Kerry Underwood

Archive for March 2013

WHEN YOUR CFA IS A DBA

with 11 comments


The personal injury market is clearly settling at 25% of damages plus recovered costs, which is hardly surprising given the very sharp reduction in recoverable costs.

 Lawyers need to beware of the trap whereby a CFA unwittingly becomes a DBA, with all that goes with it.

 You want to charge your client 25% in the event of a win and nothing if you lose. The CFA has that as the charging basis.

 That is in fact a DBA and you must give credit £ for £ for all money received from the other side AND the indemnity principle applies, limiting recovery from the losing party to a sum equal to 25% of damages.

 Defendants cannot challenge a non-recoverable success fee, but can ask for clarification of the retainer to check that they have a liability to pay.

 Claiming a sum that is not due is “a most serious disciplinary offence” – see

 Bailey v IBC Vehicles Ltd EWCA Civ 566 (27 March 1998)

 Post 1 April CFAs need drafting with considerable care.

Written by kerryunderwood

March 18, 2013 at 2:25 pm

Posted in Uncategorized

CONDITIONAL FEE AGREEMENTS, DAMAGES-BASED AGREEMENTS AND CONTINGENCY FEES

with 132 comments


CFAs and DBAs – A Quick Guide

CFA   Success Fee

DBA

CFA   without Success Fee

Indemnity principle applies

NO

YES

NO

Counsels’ fees included

NO

YES,

except in employment

NO

Capped by reference to damages

In Personal Injury Only

YES

NO

Pool of damages limited

YES

YES

NO

VAT included in any cap

YES

YES

NO

£ for £ credit given re recoverable costs

NO

YES

YES

Risk assessment required

YES

YES

NO

Onerous level of explanation

YES

YES

NO

Claimant’s Part 36 offer rendered ineffective?

NO

YES

NO

 

C

Assignment of Conditional Fee Agreements Not Possible?

 

In Jones v Spire Healthcare Ltd, Liverpool County Court 11 September 2015 case number A13YJ811

District Judge Jenkinson held that a Conditional Fee Agreement entered into between the claimant Ms Jones and the first firm of solicitors had not been validly assigned to the second firm of solicitors.

On 3 February 2012 the claimant entered into a Conditional Fee Agreement with Barnetts Solicitors which was valid according to the regulations as they then stood and on 17 January 2014 Barnetts became insolvent and administrators were appointed and sold that firm’s personal injury work to another firm of solicitors, SGI Legal LLP.

 

On 21 January 2014 a document entitled ‘Deed of Assignment’ was executed between the administrators of Barnetts and SGI Legal LLP which sought to assign, among other things, the benefits and obligations of 228 retainers between Barnetts and various clients, including Ms Jones, to SGI Legal LLP.

 

On the same day SGI Legal LLP wrote to Ms Jones in what the court called ‘entirely proper terms’ explaining that her claim had been transferred to them and that they were prepared to act for her on the basis of a Conditional Fee Agreement that she had entered into with Barnetts. They made it clear it was entirely up to Ms Jones as to whether or not she wished to instruct them or to instruct another firm of her choice.

 

Ms Jones agreed.

 

On 27 January 2014 she executed another document, again entitled ‘Deed of Assignment’ where she sought to assign both the benefit and obligations of her retainer with Barnetts to SGI Legal LLP.

In fact the lawyer dealing with the matter transferred from Barnetts to SGI Legal LLP but the court found ‘as a fact, and on a balance of probabilities, that any decision by the Claimant to transfer her instructions to SGI Legal LLP was motivated by the unexpected insolvency of her former solicitors, and the ease of continuing her claim through an equally competent personal injury firm, who already had the file, and who were prepared to continue to act on the same basis. I find that the decision was in no way influenced by the transfer of Mr Eccles to SGI Legal LLP, even if Ms Jones knew about this, which on the evidence available I consider it unlikely that she did’.

 

The claim was settled by acceptance of a Part 36 offer which imputes an entitlement to costs. However the paying party contended that there was no entitlement to costs in this case as:

 

(a)          The purported assignment of the conditional fee agreement was not valid; in fact it was a novation whereby SGI Legal LLP had entered into a new agreement with Ms Jones based upon the terms of the original Conditional Fee Agreement between her and Barnetts.

(b)          While the CFA with Barnetts was valid at the time it was entered, the effect of subsequent changes to the rules meant that the CFA, as re-entered by way of such novation was unenforceable.

 

The court correctly stated that the general principle is that a contract involving personal skill or qualifications is not capable of being assigned. The receiving party relied upon an exception to that general rule which it submitted applied following the decision in Jenkins v Young Brothers Transport Ltd (2006) 1 WLR 3189. In that case the solicitor acting for Mr Jenkins changed firms and the Conditional Fee Agreement was assigned from the first firm to the second and then from the second firm to the third firm when the solicitor again moved.

 

The judge there held that the Conditional Fee Agreement could be assigned on the basis that Mr Jenkins was loyally following an individual solicitor in which he had considerable trust or confidence from one firm to another and in that case the judge said:

 

“Whether, absent that trust and confidence, a CFA could validly be assigned is not a matter upon which it has been necessary for us to reach a conclusion.”

 

Here the judge distinguished that case and also pointed out that the Court of Appeal in Davies v Jones [2009] EWCA Civ 1164 suggested that the case may have been wrongly decided by saying:

“I have some doubt whether the relevant benefit and burden were correctly described.”

Due to the facts of the matter as set out above the judge held that here Ms Jones was not motivated in any way by particular trust and confidence in a particular fee earner, even though he had in fact transferred, and therefore held that the narrow exception to the general rule against the assignment of personal contracts as set out in Jenkins did not apply here and that ‘existing well established common law applies, and such an assignment is not possible’.

 

However the judge held that the benefit of the Conditional Fee Agreement, that is the right to be paid in the event of the claim being successful, had been validly assigned to SGI Legal LLP allowing the claimant ‘to recover the costs that would otherwise have been payable to Barnetts as a consequence of the subsequent settlement of this case’.

The judge found that there was a novation.

 

Clearly SGI Legal LLP would have been entitled to its costs going forward under the new Conditional Fee Agreement but as that simply replicated the old agreement, and there was no fresh agreement, it failed to satisfy the new provisions of the Conditional Fee Agreements Order 2013, specifically in that it did not impose the damages-based cap at 25% of general damages and past special damages.

Consequently the new retainer was invalid and did not allow recovery of SGI Legal’s costs.

At paragraph 25 the court said:

 

“25.        In summary, therefore, I find as follows:-

(a)          The conditional fee agreement between Ms Jones and Barnetts has not been assigned to SGI Legal LLP. Accordingly, and on simple application of the indemnity principle, it is not possible to base a claim for costs incurred by SGI Legal LLP parasitic to the terms of that CFA, valid as it was when entered with Barnetts;

(b)          The benefit of the retainer between Barnetts and Ms Jones has been validly assigned to SGI Legal LLP, and the Claimant is accordingly entitled to claim the costs incurred by Barnetts;

(c)           The agreement between Ms Jones and SGI Legal LLP was a novation, based on the terms of the original CFA with Barnetts, but taking effect from 27 January 2014. However, at that stage the CFA fell foul of the regulations which had been amended since the date that the CFA was originally validly entered with Barnetts. It is accordingly rendered unenforceable by section 58 (1) of the 1990 Act, and there is therefore no enforceable retainer upon which a claim for the costs incurred by SGI Legal LLP can be based.”

 

At paragraph 26 the judge said that the claimant could only recover the costs incurred by Barnetts plus ‘potentially, disbursements incurred by SGI Legal LLP’.

 

Comment

 

This is a confusing and inconsistent judgment.

The central point concerning problems with the Jenkins case may well be right. However I do not see how, given the clear finding at paragraph 25(a) that there has been no assignment of the Conditional Fee Agreement. The judge then found at paragraph 25(b) that the benefit of the retainer between the parties to that unassigned Conditional Fee Agreement, Barnetts and Ms Jones has been validly assigned to the new solicitors SGI Legal LLP.

 

There is no doubt that the original Conditional Fee Agreement between Ms Jones and Barnetts was valid and therefore that was the retainer between them and if that agreement, being the retainer, ends, and is not assigned, then it seems to me that the retainer also ends and therefore paragraph 25(a) and (b) cannot both be correct.

 

Thus the judge appears to be holding that there was a retainer of some other kind between the original solicitors, Barnetts, and Ms Jones which was capable of valid assignment.

However at paragraph 25(c), in relation to the arrangements between Ms Jones and SGI Legal LLP, the judge says there is no valid CFA between Ms Jones and SGI Legal LLP and no other retainer either.

 

I cannot see the logic of that. Either the CFA is the complete and only retainer, or it is not. If it is not, which appears to be finding at paragraph 25(b) then why cannot there be a retainer outside the CFA between Ms Jones and SGI Legal LLP?

If there is no retainer how can SGI Legal LLP possibly recover disbursements – see paragraph 26?

Overall this judgment has the bizarre result that SGI Legal LLP may be able to claim disbursements but not costs, even though they won the case for the claimant, but that costs can be claimed for the work done by Barnetts under a Conditional Fee Agreement even if they did not win the case!

 

In Kai Surrey v Barnet and Chase Farm Hospitals NHS Trust [2015] EWHC B 16 (Costs) the Senior Courts Costs Office recognised that solicitors often use the success fee “to meet the own client costs written off” (paragraph 50).

 

This is an important point. Arrangements that ensure that the solicitor can charge 25% of damages criticised obiter in A & B v The Royal Mail Group – District Judge Lumb Birmingham County Court [2015] EW Misc B24 (CC) (14 August 2015) also guarantee the client 75% if the solicitor is prepared to absorb all other unrecovered costs in that 25%.

 

This is the Underwoods Method.

 

A lower percentage take by way of a success fee of say 20%, does not necessarily guarantee the client 80% as the solicitor may charge unrecovered costs and disbursements on top.

It is the sum guaranteed to the client, not the solicitor’s charge, which is the crucial client protection measure, something that seems to have been lost on District Judge Lumb in A & B v The Royal Mail Group, along with quite a number of issues of law and common sense and professional conduct.

 

CONDITIONAL FEE AGREEMENTS

 

On 17 December 2015 the Ministry of Justice announced that with effect from April 2016 recoverability of ATE premiums and success fees will cease in insolvency matters.

That will leave full recoverability of ATE premiums and success fees in mesothelioma cases and defamation and privacy cases.

There is limited recoverability in clinical negligence cases in that the ATE premium in relation to the cost of a liability and causation medical report remains recoverable.

At the same time Justice Minister Lord Faulks said that the review of those remaining exemptions is unlikely to take place until the end of 2017 or the beginning of 2018.

Part 2 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 is headed Litigation Funding and Costs and deals with conditional fee agreement success fees (section 44), damages-based agreements (section 45), recovery of insurance premiums by way of costs (section 46), recoverability of “self-insurance” premia by membership organisations (section 47) and offers to settle and the payment of additional amounts to successful claimants (section 55).

 

These provisions implement the Jackson reforms insofar as they require primary legislation, and Article 3 of The Legal Aid, Sentencing and Punishment of Offenders Act 2012 (Commencement No 5 and Saving Provision) Order 2013 brought sections 44-47 in to force on 1 April 2013. The Order brought in to effect, from 19 January 2013, the power to make orders, regulations and rules of court under the Act, and The Conditional Fee Agreements Order 2013, dealt with below, does just that in relation to conditional fee agreements.

 

In BNM v Mirror Group Newspapers Ltd [2016] EWHC B1 (Costs)

the Senior Courts Costs Office rejected submissions by a publisher that the recoverability of additional liabilities in privacy proceedings was unlawful and placed the United Kingdom in breach of its obligations under the European Convention on Human Rights and the court in breach of its obligations under the Human Rights Act 1998.

Mirror Group Newspapers submitted that a costs order in favour of the receiving party could not include a provision requiring payment of success fees under Conditional Fee Agreements between the claimant and its lawyers, or costs in respect of the claimant’s After-the-Event insurance policy.

They maintained that any such costs order would unlawfully interfere with their Article 10 right to free expression.

Mirror Group Newspapers relied on

MGN v UK [2011] ECHR 66

in which the European Court of Human Rights had found the recoverability regime to be incompatible with both Article 10 and Section 6 of the Human Rights Act 1998, which requires courts not to act in a way which is incompatible with the European Convention on Human Rights.

The Senior Costs Judge here held that he did not have jurisdiction to make the declaration of incompatibility sought by MGN, but did have jurisdiction to allow or refuse the recoverability of additional liabilities.

He held that he was bound by

Campbell v MGN [2004] UKHL 22

to find that an order allowing the claimant to recover additional liabilities would not be a violation of the publisher’s right to freedom of expression under Article 10 and Section 6(1) of the Human Rights Act 1998 did not prevent the making of such an order.

The Senior Costs Judge noted that the After-the-Event insurance point had not arisen for consideration in the Campbell case but had arisen in

Coventry v Lawrence [2015] UKSC 50 in the context of Article 6 of the Convention.

As with the Supreme Court in Coventry, the Master held that the recoverability of premiums under Section 29 of the Access to Justice Act 1999 was part of the same regime as the recoverability of success fees and therefore for the reasons given by the House of Lords in Campbell v MGN, an order requiring payment of costs associated with an ATE insurance policy would not infringe Article 10 rights.

The decision confirms that, save in exceptional circumstances, the law of England and Wales as established by domestic precedents is not dis-applied where there is an inconsistent decision of the European Court of Human Rights – see

 

Kay v Lambeth London Borough Council [2006] 2 AC 465

 

In Kai Surrey v Barnet and Chase Farm Hospitals NHS Trust [2015] EWHC B 16 (Costs)

 

the Senior Courts Costs Office recognised that solicitors often use the success fee “to meet the own client costs written off”. (Paragraph 50).

 

This is an important point. Arrangements that ensure that the solicitor can charge 25% of damages criticised obiter in A & B v The Royal Mail Group – District Judge Lumb Birmingham County Court [2015] EW Misc B24 (CC) (14 August 2015) also guarantee the client 75% if the solicitor is prepared to absorb all other unrecovered costs in that 25%.

 

This is the Underwoods Method.

 

A lower percentage take by way of a success fee of say 20%, does not necessarily guarantee the client 80% as the solicitor may charge unrecovered costs and disbursements on top.

 

It is the sum guaranteed to the client, not the solicitor’s charge, which is the crucial client protection measure, something that seems to have been lost on District Judge Lumb in A & B v The Royal Mail Group, along with quite a number of issues of law and commonsense and professional conduct.

 

Provisional Assessment

 

In Mehmi v Pincher 20 July 2015 Liverpool County Court Unreported

 

HHJ Wood held that a decision on the papers in a Provisional Assessment was not a sanction but a judicial determination.

 

Consequently an oral review was possible and thus here the receiving party was entitled to such an oral review where the Regional Costs Judge could decide whether the assessment remained valid.

 

The judge also held that an oral review of a Provisional Assessment was not akin to an appeal, where there were restrictions on the admission of fresh evidence, but rather was a new hearing where new evidence could be produced.

 

Here the Costs Judge had assessed costs at nil due to the receiving party’s failure to produce the necessary documents under Practice Direction 47.13.2, here a Conditional Fee Agreement.

 

On appeal the judge said that there is a typographical error in the wording of Form N258 – Request for Provisional/Detailed Assessment – which might have misled lawyers into thinking that it was not necessary to file the Conditional Fee Agreement or other retainer.

 

THE CONDITIONAL FEE AGREEMENTS ORDER 2013

 

The Conditional Fee Agreements Order 2013 came in to effect on 1 April 2013.

 

The Order revokes in its entirety The Conditional Fee Agreements Order 2000.

 

Scope

 

The scope of work covered by Conditional Fee Agreements remains unchanged, essentially all work except family and crime with the proviso that criminal proceedings under section 82 of the Environmental Protection Act 1990 may be the subject of a conditional fee agreement without a success fee. (Article 2).

 

Success Fees

 

The system of Fixed Success Fees applicable in Road Traffic Accident, Employers’ Liability and Industrial Disease cases is scrapped in relation to Conditional Fee Agreements entered in to on or after 1 April 2013, with the exception of mesothelioma claims where recoverability continues and the fixed recoverable success fee of 27.5% remains in place.

 

It is unclear whether there must be a full risk assessment in each and every case where there is a success fee claimed, which of course will only be from one’s own client as recoverability is abolished. In Road Traffic Accident matters this is likely to be between 10% and 20% on a risk assessment basis.

 

The maximum success fee is 100%, (Article 3), of base costs, but with additional restrictions in personal injury cases.

 

The court has a number of options if a risk based success fee is required:-

 

  1. To utilize the abolished fixed success fee of 12.5%.

 

  1. To revert to Callery v Gray [2001] EWCA Civ 1117, that is 20%.

 

  1. To follow their own decision in Beal v Russell [2011] SCCO, where they awarded 5% in relation to a pre-fixed success fee road traffic accident case. It is true that liability had been admitted in that case.

 

  1. To take the view that it should not interfere in a contract freely entered in to by an adult with capacity.

 

In Beal v Russell [2011] SCCO, the Senior Courts Costs Office, in a case pre-dating fixed success fees, held that a 5% success fee was appropriate in a road traffic accident claim where liability was admitted before the CFA was signed. The Claimant was seriously injured in a road traffic accident and the Defendant’s insurers admitted liability and made payments on account and offer to settle for £115,000. Ms Beal issued on the day before limitation and six months later entered into a CFA with her solicitors and the claim eventually settled. The court held that 5% was the appropriate success fee.

 

A similar decision, awarding 5% success fee, was made on similar facts in Haines v Sarner by Master Howarth [2005] EWHC 90009 (Costs).

 

I appreciate that that is where liability was admitted, but it is a short step from that to say that as liability is admitted in around 99% of such cases, 5% is the appropriate fee.

 

Note that the maximum uplift of 100% is on the lawyer’s fee, that is solicitor and own client costs, and NOT just on recoverable costs – see Explanatory Note. Also, although the percentage maximum of damages in relation to personal injury cases includes counsel’s fees and Queen’s Counsel fees the maximum uplift of 100% applies to counsel’s fees and Queen’s Counsel’s fees separately; in other words the solicitor’s solicitor and own client costs AND counsel’s AND Queen’s Counsel’s fees can be uplifted by a maximum of 100%.

 

This makes sense as otherwise the amount of the success fee would depend upon who did the work, solicitor or counsel.

 

Is Risk Assessment necessary?

 

Nowhere in The Conditional Fee Agreements Order 2013 is there any reference to risk assessment as a basis of calculating the success fee.

 

The Government had said all along that there would be. In its October 2012 update the Ministry of Justice said that solicitors would be required to provide clear information to the client on how the success fee had been calculated including showing the breakdown between solicitor and counsel, if appropriate, adding

 

“This will be a new requirement for both CFAs and damages-based agreements (DBAs), and is designed to help transparency and consumer protection, and make it easier for clients to compare success fees”.

 

None of this has made it in to The Conditional Fee Agreements Order, although there is a faint echo of it in Regulation 3 of The Damages-Based Agreements Regulations 2013 in relation to DBAs:

 

“3. The requirements prescribed for the purposes of section 58AA(4)(c) of the Act are that the terms and conditions of a damages-based agreement must specify –

 

  • the claim or proceedings or parts of them to which the agreement relates;

 

  • the circumstances in which the representative’s payment, expenses and costs, or part of them, are payable; and

 

  • the reason for setting the amount of the payment at the level agreed, which, in an employment matter, shall have regard to, where appropriate, whether the claim or proceedings is one of several similar claims or proceedings.”

 

Nothing similar to 3(c) has made it in to The Conditional Fee Agreements Order 2013.

 

Further evidence that, without telling anyone, the Government has changed its mind is contained in the 27 February 2013 Ministry of Justice Consultation response: Extension of the Road Traffic Accident Personal Injury Scheme: proposals on fixed recoverable costs.

 

In its response to the suggestion that lower recoverable fees will lead to a reduction in the quality of legal advice the Government says, at paragraph 45:

 

“It should be remembered that when the provisions in Part 2 of the LASPO Act 2012 are enacted, success fees in personal injury cases will no longer be limited to 12.5%. Solicitors will be free to negotiate with their client for success fees up to 25% of damages for pain, suffering and loss of amenity and historic pecuniary loss.”

 

Leaving aside the Ministry of Justice’s confusion between costs-based success fees (12.5%) and the damages-based success fee of 25% and leaving aside the fact that it was only in road traffic accident matters, not personal injury cases generally, that the costs-based success fee was limited to 12.5%, it does indicate that risk-based success fees have been scrapped.

 

Thus the only costs-based limit on success fee is 100% (Article 3 of The Conditional Fee Agreements Order 2013).

 

Thus it seems that at long last the Underwoods Method is officially the law of the land. Unofficially it always was.

 

That method, established in pre-recoverability days, involved always having a 100% costs-based success fee, but always capping the damages taken from the client at 25%.

 

NIL SUCCESS FEE

 

Does Qualified One-Way Costs Shifting (QOCS) apply to a case where there is a success fee but that success fee is set at nil?

 

Such arrangements were not uncommon; it is widely used in cases where Before the Event legal insurance is in place and was often used where claims were funded by a Trade Union. The issue affects a huge number of agreements.

 

This scenario is simply not addressed in the rules, possibly because the members were unaware of the existence of such arrangements.

 

As we have seen above, QOCS does not apply to “proceedings where the claimant has entered into a pre-commencement funding arrangement (as defined in Rule 48.2)”. (CPR 44.17).

 

CPR 48.2 (1) says:-

 

“(i)          a funding arrangement as defined by rule 43.2(1)(k)(i) where –

 

(aa)        the agreement was entered into before 1 April 2013 specifically for the purposes of the provision to the person by whom the success fee is payable of advocacy or litigation services in relation to the matter that is the subject of the proceedings in which the costs order is to be made…”

 

Clearly a Conditional Fee Agreement with a nil success fee does indeed have a success fee, albeit that that success fee is nil.

 

However in circumstances where there is no success fee payable, because it is nil, it seems to me that there is no provision to the person “by whom the success fee is payable” of the relevant services so as to come within the definition of “a funding arrangement” so as to disqualify the claimant from the protection of QOCS.

 

The Oxford English Dictionary defines “payable” as:-

 

  1. that is to be paid; due, owing; falling due

 

  1. that can be paid; capable of being paid

 

Pay is defined as:-

 

“The action of paying, as a verb it is defined as:-

 

  1. to give

 

  1. (personal) what is due in discharge of a debt, or as a return for services done, or goods received, or in compensation for injury done; to remunerate, recompense.

 

  1. to give a recompense for, to recompense, reward, requite (a service, work, or action of any kind)

 

  1. to give, deliver, or hand over (money, or some other thing) in return for goods or services, or in discharge of an obligation; to render (a sum or amount owed).

 

  1. to give or hand over the amount of, give money in discharge of (a debt, dues, tribute, tithes, ransom, fees, hire, wages, etc.)

 

  1. to give money or other equivalent in return for something or in discharge for an obligation;”

 

In my view there cannot be payment of zero and therefore there can be nothing payable and therefore a nil success fee cannot be “payable” and therefore such an arrangement is not disqualified from QOCS protection.

 

Thus on balance, my view is that a pre-1 April 2013 Conditional Fee Agreement with a success fee set at nil DOES attract the protection of QOCS, but that is only my view on balance.

 

It would have been nice had the Rules Committee dealt with this in their rules or in the Practice Direction accompanying those rules.

 

The courts must give a purposive construction to legislation and secondary legislation and rules approved by Parliament. Clearly the intention was that a party who is not seeking to recover any additional liability from the other side should attract QOCS protection, or to put it another way a person who is seeking to recover an additional liability from the other side should be deprived of QOCS protection.

 

In those circumstances, where there is nothing in fact recoverable from the other side, the purposive construction would give the claimant QOCS protection.

 

Note that if there was any recoverable After-the-Event insurance premium that disqualifies the claimant from QOCS protection.

 

 

RISK ASSESSMENT AND CHILDREN’S CASES

 

The law is the same for children as it is for adults.

 

However there is a new summary assessment procedure in relation to deductions from damages in children’s cases, implemented by the Civil Procedure (Amendment No. 8) Rules 2014 (SI 2014 No. 3299) (L.36).

 

This came into force on 6 April 2015 and new Practice Direction 21.11.3 provides that where an application is made under the new procedure there must be attached a copy of the Conditional Fee Agreement and the risk assessment by reference to which the success fee was determined.

 

This suggests that the Rules Committee think that a risk assessment is still necessary, even though the Civil Procedure Rules themselves, drafted by the same Rules Committee, do not say that.

 

In A & M (by their litigation friend) v Royal Mail Group (No 2) [2015] MISC B30 (CC)

District Judge Lumb, sitting in Birmingham County Court, was dealing with litigation expenses incurred by a litigation friend. The relevant rule is CPR 21.12.

Given the publicity that this decision, a first instance one binding on no one and logically flawed, it should be noted that this was not a solicitor and own client assessment and not a between the parties assessment and is very much confined to its own facts, that is dealing only with deductions from children’s damages.

The litigation friend, subject to any Solicitors Act 1974 Assessment, remains liable for the full cost and success fee agreed with the child’s solicitor. CPR 21.12 simply deals with what may be deducted from a child’s damages, not whether the legal fees are payable or not.

This was a fixed recoverable costs case and so between the parties costs were not an issue.
The infant claimants brought  personal injury claims through their litigation friend and damages were assessed and provisionally approved by the court subject to costs, specifically sums to be deducted from those damages.

In the initial judgment [2015] EW MISC B24 (CC) 14 August 2015 DJ Lumb indicated that he was not prepared to approve deduction of an ATE premium and was not prepared summarily to assess the success fee, nor have a detailed assessment.

He gave directions for summary assessment on paper, basically directing the claimants’ solicitors to file further documents explaining the figures involved.
The costs schedule for M’s claim was £4,682.44 of which profit costs were £3,003.70. The success fee claimed was 100%, thus also £3,003.70 but capped at 25% of damages.

As damages were £2,065.00 the actual total claimed was £516.25 including VAT and £430.21 exclusive of VAT amounting to a true success fee of 14.3%,  that being the uplift on base costs.

In relation to A the costs claimed were also £4,682.44 of which profit costs were £3,045.15, but capped at 25% of damages. As damages were £2,115.00 the actual total claimed was £528.00 including VAT,  that is £440.63 excluding VAT and therefore amounting to a true success fee of 14.47%.

DJ Lumb described it as “patently absurd that anyone should pursue damages claims totalling £4,180.00 at a risk of having to pay £6,432.04 in doing so.”

He also noted that while the retainer documentation suggested an exclusion of the protection under section 74 (3) of the Solicitors Act 1974, according to the judge it did not appear that the litigation friend realised that he was giving up those rights. The judge suggested that that might be relevant in a Solicitors Act 1974 solicitor and own client assessment.

I have no idea whether on the facts of this case that is correct or not, but a properly worded retainer does involve the litigation friend, or client, agreeing an hourly rate and the Senior Courts Costs Office will not interfere with that rate.

The judge said that under CPR 21.12:-

“Simply because an ill-informed litigation friend signs up to a CFA with a success fee of 100% does not automatically mean that a 100% success fee is a reasonable expense for the purposes of CPR 21.12.”

That must be right.

However, as we have seen, the true success fees here were a fraction of that being between 14% and 15%.

The judge said that the court had to look at all of the circumstances in judging what was a reasonable success fee, but in fact he then looked only at risk, and assessed the success fee at 5%. He added 5% for postponed receipt of costs,  that is the fact that unlike in other litigation a solicitor does not get paid anything until the end of the case.
Coincidently or not that gave a total success fee of 10%, the “bonus” that clients get under Simmons v Castle in return for the non-recovery of the success fee post Jackson.
Actually it is not. The 10% is an uplift on damages; here the costs uplift was 10%, not the damages cap.

In each case the success fee sought was 100% of profit costs capped at 25% of damages, which was not a smart move by the solicitors in a case involving children.

For the purposes of CPR 21.12 the judge assessed base costs as the success fee and it is, by law, a percentage uplift on those base costs and reduced them notionally, purely for the purposes of calculating the success fee base, by 60%.

Again that must be right. However it is important to note that the reduction was purely notional in order to calculate the deduction of costs from the child’s damages. It does not affect the sum due from the litigation friend.

Given that many judges, rightly or wrongly, are point blank refusing to allow any deductions from a child’s damages by way of costs, DJ Lumb was actually relatively generous in this case, not something that you will have gleaned from the less well informed of the legal media.

I will not bother to comment on the judge’s other remarks concerning the method of having a success fee and then capping it by reference to damages.

Parliament has approved that scheme, Parliament has specifically allowed contingency fees to continue in personal injury work, as compared for example with employment work, and Parliament has specifically sanctioned a 25% deduction of damages by way of a Damages-Based Agreement.

I have only bothered to write this case up because of the attention it has received elsewhere and I want to correct the impression that has been created.

In fact this is a case of no significance whatsoever.

 

FIXED RECOVERABLE SUCCESS FEES

 

In James v Ireland [2015] EWHC 1259 (QB)

 

the Queen’s Bench Division of the High Court held that under the Fixed Recoverable Success Fee Scheme the 100% increase was payable when a settlement is reached after the commencement of the final contested hearing, or as in this case, the contested hearing of the liability issue. It is not triggered by the commencement of any hearing of whatever nature related to the contested liability hearing.

 

The court overturned the lower court’s decision that the trial had “commenced” for the purpose of CPR 45.15 and the High Court held that a trial did not “commence” when an application was made for an adjournment and nor did it commence just because certain case management hearings and decisions had taken place.

 

Here the hearing of the claim was listed for three days to start on 8 June 2011 and on that first day the trial of the issue of quantum was adjourned and on 9 June 2011 the issue of liability was stood out. The claim settled before the next hearing. The question for the Master was whether the trial of the issue of liability had commenced before it was stood out on 9 June 2011. The Master held that the liability trial had started on 8 June 2011 after the application to adjourn the issue of quantum was determined and thus allowed a 100% recoverable success fee, but the High Court overturned that finding and substituted a 12.5% recoverable success fee for the solicitors and 75% for counsel, this being a road traffic matter.
The sum involved on a 100% basis was £320,000.00.

 

CPR 45.15(6) reads: –

 

“…

 

(b)          a reference to “trial” is a reference to the final contested hearing or to the contested hearing of any issue ordered to be tried separately;

 

(c)           a reference to a claim concluding at trial is a reference to a claim concluding by settlement after the trial has commenced or by judgment.”

 

 

FIXED RECOVERABLE SUCCESS FEES: DEFINITION OF EMPLOYEE

 

In Broni and Others v Ministry of Defence [2015] EWHC 66 (QB) 20 January 2015

 

the Queen’s Bench Division of the High Court held that the pre 1 April 2013 Fixed Recoverable Success Fee Scheme contained in CPR 45 Section IV did not apply to claims brought by members of the Armed Forces in respect of injuries suffered in the course of service.

 

The High Court thus allowed appeals against three decisions of Masters in the Senior Courts Costs Office who had held that the regime did apply as the claimants were employees within the meaning of CPR 45.20(1)(a), which states that:-

 

“This section applies where… the dispute is between an employee and his employer”.

 

CPR 45.20(3)(b) states that employee has the meaning given to it by section 2(1) of the Employer’s Liability (Compulsory Insurance) Act 1969 which states:-

 

“For the purposes of this Act the term “employee” means an individual who has entered into or works under a contract of service or apprenticeship with an employer whether by way of manual labour, clerical work or otherwise, whether such contract is expressed or implied, oral or in writing.”

 

The claimants argued that serving members of the Armed Forces did not work under a contract of service and thus were not employees. They relied on the judgment in Quinn v Ministry of Defence [1998] PIQR 387 where the court said:-

 

“For my part, I would have no doubt at all that when Mr Quinn enlisted in the Royal Navy pursuant to the King’s Regulations neither he nor the Crown had any intention to create legal relations. Further, as a matter of public policy… there is binding authority that there is no such contract. In relation to members of the Armed Forces, as with Police Officers, I can see no reason to find that those long-standing public policy considerations should be changed.”

 

The High Court accepted that this argument whilst recognising that there could be a considerable number of groups outside the Fixed Recoverable Success Fee Scheme, such as Police Officers, Civil Servants and Members of the Judiciary.

 

By Paragraph 1.1(13) of the Employers’ Liability Portal “employee” has the meaning given to it by section 2(1)of the Employer’s Liability (Compulsory Insurance) Act 1969”.

 

Consequently this decision excludes all of those types of workers from the Employers’ Liability portal and they move into the Public Liability portal.  This is because paragraph 1.1(18) says:

 

(18)           “Public Liability claim”

 

  • Means a claim for damages for personal injuries arising out of a breach of a statutory or common law duty of care made against –

 

  • a person other than the claimants employer; or

 

  • the claimant’s employer in respect of matters arising other than in the course of the claimant’s employment; but

 

  • does not include a claim for damages arising from a disease that the claimant is alleged to have contracted as a consequence of breach of statutory or common law duties of care, other than a physical or psychological injury caused by an accident or other single event;

 

As the Employers’ Liability and Public Liability portal is one and the same this makes virtually no difference within the portal.

 

However once outside the portal it does make a significant difference.  Pre-issue for claims between £1,000 and £5,000 the fixed recoverable costs are the same, but for all other matters public liability fixed recoverable costs are lower than Employers’ Liability fixed recoverable costs.

 

I set out at the end of this piece in Chapter 3 of my 1998 book “No Win No Fee No Worries”.

 

These recent cases demonstrate the judicial hostility that still exists towards any form of conditional or contingency fee.

 

 

INVESTIGATING CLIENT’S FUNDING OPTIONS  

 

In McDaniel and Co v Clark, QBD 15 October 2014

 

Mr Justice Hickinbottom, upholding the decision of the Master, assessed the Claimant’s solicitor’s costs at nil where the solicitor had failed to make any enquiries about funding.

 

The client had been injured at work and instructed solicitors to act for her; the client was a Trade Union member who would have got free representation through the Union, subject to the merits of the claim.

 

Her solicitor failed to make any enquiries and the client instructed new solicitors who settled her claim. Her former solicitors then sued for costs.

 

The Master held that the solicitor’s failure to make enquiries was unreasonable and assessed the costs at nil and the High Court Judge dismissed that appeal, holding that:-

 

  • there was sufficient evidence for the Master to make the findings and facts;

 

  • it was clear in the letter from the Trade Union that funding would have been provided and that that funding was free;

 

  • the Union would have taken the case had it been instructed from the outset;

 

  • the Master considered that the solicitors had failed to give proper advice concerning funding;

 

  • the client had shown, on balance of probabilities, that she would have taken union funding

 

COMMENT

 

If a client is a member of a Trade Union, then surely it is for the client, not the solicitor, to ascertain whether the union will fund the case. Likewise legal expenses insurance.

Legal aid is different as a client has not taken out or joined a scheme in the way that he has with a union or insurance.

To insist that solicitors check to see if a client has taken out insurance or joined a Trade Union is taking the Nanny State a step too far.

In Cox v Woodlands Manor Care Home Ltd1, the Court of Appeal held that a Conditional Fee Agreement which has no cancellation notice in place in circumstances where one is required under the Cancellation of Contracts Made in a Consumer’s Home or Place of Work Regulations 2008 is unenforceable2.

The same principle applies to the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 20133 which replaced the 2008 Regulations, but not retrospectively. CFAs entered into between 1 October 2008 and 12 June 2014 are covered by the 2008 Regulations and those since 13 June 2014 by the 2013 Regulations.

If the CFA is deemed unenforceable as between solicitor and client and anything claimed under it is likely to be deemed irrecoverable against the other party due to the indemnity principle.

That is what happened in this case.

Here the claimant also had legal expenses insurance. The Court of Appeal held that the existence of such insurance did not affect the validity of the CFA.

Facts

The claimant claimed damages for personal injury arising out of an accident at work and instructed solicitors but also had Before-the-Event Legal Expenses Insurance as part of her household insurance.

She was advised that the insurers would try and use their panel solicitors rather than her solicitors.

Nevertheless she signed a CFA with her own firm and also made a claim on her insurance and the firm came to her home to sign the CFA.

That firm then sent a Pre-Action Protocol letter and attended on a witness and were clearly working under that CFA and shortly after the CFA has been signed the insurers told the claimant that she would have to use different solicitors, that is their panel solicitors.

The claim was settled for £100,000.00 with costs on the standard basis.

On assessment of costs the court had to decide whether or not the CFA was binding; if it was then there had to be compliance with the cancellation regulations and the argument was whether or not the CFA was enforceable by the solicitor against its own client. If so then the defendant was liable for costs; if not the defendants argued that the indemnity principle meant that they did not have to pay.

At first instance the costs judge found that the CFA was not in fact made when it was signed as there was no intention to create legal relations until the situation concerning BTE had been clarified and, therefore, there was no need to consider the 2008 Regulations and the enforceability point.

On appeal the judge held that just because the CFA might have ceased to operate, that is if the BTE insurers agreed that the claimant’s own solicitors could be instructed, that did not prevent it from being legally effective when signed. In those circumstances the regulations applied and the CFA was unenforceable and the indemnity principle meant that the defendants did not have to pay anything.

On appeal to the Court of Appeal that court held:

(1)       The CFA had been made for the purpose of the regulations when it was signed and there was clearly an intention to create legal relations at that point.

(2)       The CFA was binding which meant that it was also unenforceable for failure to comply with the 2008 Regulations.

(3)       Due to the indemnity principle the claimant was not entitle to recover any costs from the defendant.

 

Conditional Fee Agreements and Legal Aid

 

In AMH v The Scout Association, SCCO, Case HQ13X05225, January 2015

 

the Senior Courts Costs Office held that a claimant who switched from legal aid funding to a Conditional Fee Agreement and After-the-Event insurance just before the commencement of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 acted reasonably and was thus entitled to recover the success fee and ATE insurance premium.

 

The claimant’s solicitor had recommended the change as he was concerned that the Legal Services Commission might not provide sufficient funding for trial and that the claimant could lose eligibility for legal aid as he might obtain employment. The solicitor was aware that recoverable success fees would cease in relation to CFAs entered into on or after 1 April 2013.
There was only a brief telephone discussion between solicitor and client and Master Leonard found that while the solicitor had been obliged to consider the risk of losing legal aid he had focused upon a key issue in relation to the preservation of his client’s damages but his advice was incomplete because it did not go into all aspects of LASPO, such as Qualified One-Way Costs Shifting and a capped success fee.

 

However the Master said that it did not follow that if a funding choice was not made on the best available information it must be unreasonable. The issue was whether the choice was reasonable in all the circumstances and here it was crucial that the client was being offered a CFA Lite which guaranteed that he would not lose any damages to meet unpaid costs.

 

In Hyde v Milton Keynes Hospital NHS Foundation Trust [2015] EWHC B17 (Costs)

 

the Senior Courts Costs Office held that a claimant was entitled to fund her personal injury claim via a Conditional Fee Agreement (CFA) and After-the-Event (ATE) insurance policy without formally discontinuing her existing funding via a Community Legal Services (CLS) Funding Certificate, that is legal aid.

 

It thus rejected the defendant’s submission that solicitors cannot lawfully charge for their services in addition to the fees recoverable under an extant CLS Certificate. It also rejected the defendant’s alternative argument that it was unreasonable to jettison public funding for a CFA.

 

The claimant said that she was entitled to change her method of funding given the costs limitation imposed by the CLS certificate which meant that the solicitors could not continue otherwise.

 

The decision potentially affects a number of cases where claimants switched from legal aid to a CFA in or around March 2013 to benefit from the ability to recover a success fee and the ATE premium prior to the ending of recoverability.

 

Even if the value of the certificate had been used up its continued existence gave the claimant protection against an adverse costs order, here potentially in relation to failure to beat the defendant’s Part 36 offer.

 

However the court held that service of Form N251, Notice of Funding, on 25 March 2013 ended the claimant’s ability to rely on that costs protection. The court said:-

 

“39… where a party has exhausted the costs that can be claimed under a certificate so that it is ‘spent’, they can in principle establish a discharge by conduct in the same manner as certificates in which all of the work up to a limitation of scope has been carried out. The effect of that discharge is to end the services funded by the LSC and enable a private retainer to fund the remainder of the proceedings.

 

  1. The notification of the new funding arrangement in form N251 satisfies the need for formality in notifying the opponent of the ending of costs protection.”

 

The solicitor’s success fee was reduced from 50% to 20%. Counsel’s success fee was reduced from 100% to 10% to reflect the fact that counsel did not “take any Part 36 risk.”

 

A similar issue arose in Kai Surrey v Barnet and Chase Farm Hospitals NHS Trust [2015] EWHC B 16 (Costs)

 

also a Senior Courts Costs Office decision, also heard by Master Rowley, but where he came to a different conclusion on the facts, reinforcing the point that these matters will nearly always be fact-specific.

 

The Master held that it was not reasonable for the claimant to switch from public funding to a Conditional Fee Agreement.

 

The key point here was the value of the 10% general damages uplift under Simmons v Castle [2012] EWCA Civ 1039 and 1288, available to a legally aided client but not a claimant with recoverable additional liabilities.

 

Here that 10% uplift was worth around £20,000.00 but was never explained to the claimant’s Litigation Friend. Indeed the switch from legal aid to conditional fees just before 31 March 2013 deadline was essentially a policy decision of the solicitor’s firm resulting in pro-forma letters being sent out.

 

“88…there is no evidence before me to indicate whether the claimant or his Litigation Friend would have considered the abandoning of up to £20,000.00, which was more or less guaranteed, in return for peace of mind regarding future funding. They may have decided that the system that had apparently worked for seven years was unlikely to break down in the final stages and they would rather have the money and risk the funding issues. They may have taken the view that QOCS protected them sufficiently not to incur an ATE premium. The possibilities for speculation are endless. What is certain however, is that the Simmons damages were of significance and so should have been explained to the claimant’s Litigation Friend so that informed consent to a change in funding could be given. The absence of any evidence from the Litigation Friend on this point, to my mind, speaks volumes.”

 

The court disallowed the success fee and disallowed the ATE premium.

 

In Brawley v Marczynski and Another [2002] EWCA Civ 1453

 

the Court of Appeal held that indemnity costs could be awarded in favour of a legally aided party even though the effect of that was simply to give the solicitors a bonus which the client would never have had to pay.

 

As solicitors got paid a higher rate for winning than losing in legally aided cases in any event it was effectively a form of Conditional Fee Agreement and the indemnity principle was thus abrogated.

 

This was the effect of the Civil Legal Aid (General) (Amendment) Regulations 1994 which introduced Regulation 107B into the Civil Legal Aid (General) Regulations 1989.
Thus Willis v Redbridge Health Authority [1996] 1 WLR 1228 is no longer good law as that was a decision made under the old regulations.

 

Here the Court of Appeal referred to the new arrangements as “an early example of a success fee, a concept with which, since the Access to Justice Act 1999, both the profession and the court are now becoming familiar”

 

In fact the relevant legislation was the Courts and Legal Services Act 1990 and Conditional Fee Agreements with success fees came in in 1995.

 

Interestingly the court also said (paragraph 19):-

 

“Usually, if the defendant has been unreasonable, the claimant’s lawyers will, in fact, deserve some extra remuneration even if only to compensate for the exasperation of acting against an unreasonable opponent.”

 

CFAs, Payments on Account and the Indemnity Principle

 

In XYZ v Transform Medical Group (CS) Ltd [2015] EWHC 1151 (QB)

 

the Queen’s Bench Division of the High Court ordered the defendants to pay the costs of an interim application and also ordered them to make a payment on account of that costs liability.

 

The defendants argued that as the claimants had not won the case there was no entitlement to costs under a Conditional Fee Agreement, because the case had not yet been won, and therefore any order for a payment on account of costs of an interim application would breach the indemnity principle.

 

The court started on the premise that an order for interim costs will normally be made unless there is a good reason not to make that order and CPR 44.2(8) (as amended) states:-

 

“Where the court orders a party to pay costs subject to detailed assessment, it will order that party to pay a reasonable sum on account of costs, unless there is good reason not to.”

 

The defendants argued that the issue concerning the Conditional Fee Agreement constituted a good reason, but the court rejected that argument.

 

The relevant clause from the claimants’ Conditional Fee Agreement read:-

 

“Where a summary assessment of costs or payment on account is made in your favour, you are immediately liable to pay your share of [solicitors] charges to the extent of the relevant summary assessment or payment on account.”

 

This is a clause commonly found in Conditional Fee Agreements and is in the Law Society Model Conditional Fee Agreement in these terms:-

 

“… if on the way to winning or losing you win an interim hearing, then we are entitled to payment of our basic charges and disbursements related to that hearing together with a success fee on those charges if you win overall”.

 

The court held that it is clear that the interim award of costs prior to the final completion of the case may be charged and recovered irrespective of the requirement to win the case at trial or later.

 

The Underwoods Model Conditional Fee Agreement, where relevant, reads:-

 

“If on the way to winning or losing you are awarded any costs, by agreement or court order, then we are entitled to payment of those costs, together with a success fee on those charges if you win overall.”

 

This is a reminder that Conditional Fee Agreements are not simply No Win No Fee Agreements and can contain a variety of more subtle terms which are enforceable.

 

UNLAWFUL CONTINGENCY FEES

 

In Rees v Gateley Wareing [2014] EWCA Civ 1351

 

the Court of Appeal held that a contingency fee agreement between a solicitor and client to conduct litigation was unlawful and thus the solicitor was not entitled to any fee.

 

It is a reminder that even in an age of non-recoverability of the success fee contingency fee agreements and Conditional Fee Agreements must still be carefully drafted with all the formalities complied with.

This was actually an action by the solicitor’s own clients against them but the same result would have been achieved on a between the parties assessment; if the original agreement is invalid and unenforceable then, due to the indemnity principle, there is no liability on the paying party actually to pay.

 

The agreement here was not a Conditional Fee Agreement, nor a properly constituted Damages-Based Agreement, as it predated the Damages-Based Regulations, and it provided for 5% of recovered damages to be the fee.

 

Thus the issue was whether the work carried out by the solicitor was litigation. If was not litigation, then it would be non-contentious business and by section 57 of the Solicitors Act 1974 contingency fees are lawful for such work.

 

Overturning the first instance decision the Court of Appeal held that the work was litigation and therefore the agreement was unlawful and the client did not have to pay any fees.

 

It was common ground that if litigation services were in fact provided then the agreement was unlawful but also that if the retainer contemplated the provision of litigation services, but none were in fact provided, then the retainer was enforceable.

 

Here proceedings were issued which necessitated the actual, rather than the contemplated, provision of legal services but Gateley Wareing were not the solicitors on the record; rather they “played a role mostly behind the scenes”, with a completely different firm, Wedlake Bell on the record.

 

In fact Gateley Wareing did much of the work even though Wedlake Bell was the firm on the record. Gateley Wareing’s work included collating documents for disclosure and instructing leading counsel and counsel and passing instructions onto Wedlake Bell.

 

Unsurprisingly the Court of Appeal found that Gateley Wareing were providing litigation services, albeit that Wedlake Bell were on the record.

 

As the court said at paragraph 62, any other finding would mean that

 

“…solicitors (who are not on the record as acting for a party to litigation) can carry out work which would ordinarily have to be done by solicitors on the record, and can do so in exchange for a percentage of the recoveries in the litigation. That would permit solicitors to side-step all statutory controls in respect of contingency fee agreements and CFAs by not going on the record and instead, by assisting or supporting solicitors on the record, as Gateley Wareing assisted Wedlake Bell in this case. Given that the rules in respect of CFAs are designed to provide a significant degree of control and protection, and CFAs themselves are a statutory carve-out from the previous prohibition on solicitors taking any interest in the outcome of litigation… the judge’s conclusion, that as long as solicitors are not actually on the record they can participate in litigation in this way in exchange for a percentage fee without complying with section 58, must be wrong.”

 

The terms of the retainer in issue were:-

 

“As you know, I am trying to resolve matters on a commercial basis, without the need for formal proceedings being taken. In terms of the work involved, much depends upon the reaction of the other parties and their approach to matters. There has been a significant amount of paperwork to consider contained within 7 lever arch files. It has been agreed that you will pay on client account the sum of £5,000.00 to cover the initial investigative cost. I also understand from your discussions with Craig [Mitchell] that it has been agreed that from there on in the case will be dealt with on a conditional fee basis. This firm’s charges shall be 5% of any monies recovered on your behalf, up until 22 May 2003. As from 23 May 2003, this firm’s charges shall be subject to review and agreement between the parties, but in any event not less than 5% as specified above. We shall, of course, give credit for the £5,000.00 against any eventual recovery.”

 

The Court of Appeal said that the test of whether the work fell within section 57 of the Solicitors Act 1974 non-contentious business exemption raised two, and only two, questions:-

 

  1. was the work carried out by the solicitor as solicitor; and

 

  1. if so, was the work carried out for the purposes of proceedings?

 

It was irrelevant whether the solicitor was the solicitor on the record or whether he had conducted the action.

 

The first instance judge found that the work was carried out in the capacity of solicitor; Gateley Wareing were not retained in any other capacity.

 

The Court of Appeal held that the work was carried out “for the purposes” of the litigation and was therefore contentious business and thus section 57 did not apply and “thus the critical question is whether the retainer agreement was a conditional fee agreement…”

 

Very clearly it did not comply with the formalities in relation to Conditional Fee Agreements.

 

At paragraph 30 the Court of Appeal said:-

 

“30. The judge in effect held that section 58 (1) of the Courts and Legal Services Act 1990 did not apply to an agreement made by a solicitor who was not conducting litigation, but merely providing support services, because such an agreement was not within the definition of a conditional fee agreement. Thus the concluding part of section 58 (1) which invalidates “any other conditional fee agreement” did not apply, with the consequence that there was no need to rely on section 57 of the Solicitors Act.”

 

That decision was clearly wrong.

 

The Court of Appeal said:-

 

“64.        It is, in my judgment, clear that the statutory policy at the time with which we are concerned was to prohibit contingent fees paid for the provision of litigation services. This is underlined by the decisions of this court in both Awwad v Geraghty and Co.[2001] 1 QB 750 and also in  R (Factortame  Ltd) v Secretary of State (No 8) [2002] EWCA Civ 932. In such cases there is no need for a minute examination of the common law: Parliament has prescribed what is and is not acceptable.

 

  1. In those circumstances there is no escape from the conclusion that the manner of performance of the retainer of 5 August 2002 turned the contract into one that the law will not enforce. It follows, in my judgment that Gateley Wareing are not entitled to enforce the retainer agreement in the events which have happened.”

 

The Court of Appeal rejected the argument that clients would lose out as solicitors would have to charge at the hourly rate, saying:-

 

“It would have been open to Gateley Wareing to have entered into a conditional fee agreement that complied with section 58. I can see no real difficulty in doing so.” (Paragraph 65)

 

The facts of this case pre-dated the introduction of damages-based agreements in April 2013 under Section 45 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012. It is no longer contrary to the law or public policy to have contingency fees in litigation, a fact recognised by the Court of Appeal here in the reference in paragraph 64 above to “at the time with which we are concerned”.

 

It should also be noted that even if this had been a post LASPO case the same result would almost certainly have been arrived at as the retainer here comes nowhere near satisfying the detailed statutory requirements for damages-based agreements in litigation as set out in the Damages-Based Agreements Regulations 2013.

 

Disclosure of privileged documents during assessment

 

The Senior Courts Costs Office Guide 2013 sets out the approach to disclosure in detailed assessment hearings of potentially privileged documents:

 

“If, having examined documents lodged with or produced to the court, the court is minded to determine a point of dispute wholly or partly in favour of the receiving party it does not automatically follow that the paying party will have a right to see all of the documents relied on by the court in reaching that decision. The court should enquire of the paying party whether the paying party is content to accept that ruling (subject to appeal) or whether the paying party wishes to see the documents relied on by the court in making the ruling. In many cases the paying party will be content to agree that the court alone should see those documents. The alternatives (see below) may lead to additional delay and an increase in costs.

 

(b) If the paying party declines to accept the court’s ruling without inspecting documents, then, save as explained in paras (f) to (h) below, the court will put the receiving party to his election between showing the documents in question to the paying party or not relying upon them and offering to prove the fact of which the document is evidence by some other means. Alternatively the receiving party may decide to withdraw the claim for the costs of it. The court may give directions enabling the receiving party to have a fair opportunity to provide other evidence. In reaching its final decision on the issue the court will not take account of documents which the receiving party has elected not to show to the paying party.”

 

Personal Injury Cases

 

A claim for personal injuries (including clinical negligence) is a “specified proceeding” (Article 4) with its own rules (Article 5).

 

In first instance personal injury proceedings the success fee shall not exceed 25% of damages (Article 5(1)(a)) and in appeal proceedings shall not exceed 100% of damages (Article 5(1)(b)).

 

The damages forming the pool upon which the 25% or 100% maxima can bite are:-

 

  • general damages for pain, suffering , and loss of amenity; and

 

  • damages for pecuniary loss, other than future pecuniary loss

 

net of any sums recovered by the Compensation Recovery Unit of the Department for Work and Pensions.

 

The figures of 25% and 100% of damages include VAT (see Explanatory Note), giving a profit costs percentage of 20.83% and 83.33% respectively.

 

In all cases the maximum success fee fixed by reference to damages includes the fees of counsel and Queen’s Counsel.  This makes sense as otherwise the client could end up losing 75% of damages – 25% to the solicitor, 25% to counsel and 25% to Queen’s Counsel.

 

CHILDREN

 

The 78th update to the Civil Procedure Rules, effective 6 April 2015, makes changes to the way deductions from damages in children’s cases are dealt with. The update is implemented by The Civil Procedure (Amendment no. 8) Rules 2014 (SI 2014 No 3299 (L. 36)).

 

The advice is simple: do not act for children unless you are satisfied that recoverable costs are sufficient. In reality you are never going to be able to charge the child anything. Recoverable portal costs are designed to be inadequate. Do not act for children in cases which start in the portal. Do not act for children in small claims matters.

 

Note that if you lose the case completely you can charge the child what you want. That is the genius of the new rule.

 

Contracts for legal services are contracts for necessities; if the case is lost there are no damages from which anything can be deducted, no infant approval hearing and usual solicitor and own client rules apply.

 

(For a detailed analysis of the law in relation to cases involving children see Jackson’s Children)

The new rules allow summary assessment (CPR 46.4(5)) rather than detailed assessment. This is referred to in the Practice Direction, but according to the Civil Procedure Rules Committee it was “unfortunately… omitted” from the Statutory Instrument. Unfortunate indeed. Not an excuse generally accepted by courts in relation to pleadings. Good job Denton/Mitchell does not apply to Parliament.

 

The procedure only applies:

 

  • once recoverable costs have been assessed or agreed, unless fixed recoverable costs apply;

 

  • where damages do not exceed £25,000.00;

 

  • to personal injury cases;

 

  • to the success fee, not ordinary costs.

 

There is no logic to this. As it is only the success fee that can be recovered under this mechanism, then how is the amount recoverable from the other side of any relevance? That defines the solicitor and own client/recoverable costs shortfall, and nothing else.

 

The success fee is capped at 25% of the Allowed Damages Pool and cannot exceed 100% of solicitor and own client costs. Recovered costs are entirely irrelevant to this issue.

 

Is the sub-text that the costs judge thinks that the solicitor has made a decent recovery from the other side then they should get no success fee? If so, why not? The success fee is for taking the risk. It is, and always has been, entirely separate from the amount of recovered costs.

 

Supposing there is a shortfall of £1,000 in recovered costs as against solicitor and own client costs, and that by coincidence the damages are £4,000 and the solicitor has capped her or his charges, of any kind, to 25% of damages – the Underwoods Method.

 

Thus the solicitor wishes to charge the child £1,000, but can only use this mechanism in relation to a success fee. Is the solicitor free to waive the unrecovered solicitor and own client costs and treat it all as a success fee? Or is the unrecovered cost the “first charge” or the contractually agreed maximum?

 

It is unclear what happens where damages exceed £25,000.00; presumably these are still subject to the detailed assessment procedure, but the old rules, which therefore continue to apply to such cases, are silent on the issue.

 

The Wrong Ministry of Justice Note

 

The Explanatory Note by the Ministry of Justice says:- “Amendments are made to address the growing number of applications made at approval hearings for payment out of damages awarded to a child or a protected party (a person lacking capacity to make decisions) to meet the success fee provided for in a conditional fee agreement or damages-based agreement entered into between the litigation friend (who represents the interests of the child or protected party) and the solicitor for the child or protected party. The rules are amended to reflect when and how a deduction from damages of a sum to meet any shortfall between the costs recoverable from the other party and the ‘solicitor and own client’ costs payable to the child or protected party’s solicitors applies. The amendments are confined to cases where the damages agreed or orders to be paid do not exceed £25,000.”

 

That would clearly cover any shortfall between the hourly rates charged by the solicitor and the sum recovered from the other side, that is the conventional shortfall between recovered costs and solicitor and own client costs, even where there is no success fee.

 

The Actual Law

 

However that is not what the new rules say. New CPR 21.12(1A) reads as follows:-

 

“(1A) Costs recoverable under this rule are limited to –

 

  • costs incurred by or on behalf of a child and which have been assessed by way of detailed assessment pursuant to rule 46.4(2); or

 

  • costs incurred by or on behalf of a child by way of success fee under a conditional fee agreement or sum payable under a damages-based agreement in a claim for damages for personal injury where the damages agreed or ordered to be paid do not exceed £25,000.00, which ere such costs have been assessed summarily pursuant to rule 46.4(5).”

 

The Explanatory Note to the Statutory Instrument, as compared with the Ministry of Justice’s Explanatory Note, states that the Rules are “amending rule 21.12, which concerns expenses incurred by a litigation friend, so that it covers the position wherever full recovery of costs from the other party to the proceedings is not achieved or is not possible by virtue of the changes brought about by the Legal Aid, Sentencing and Punishment of Offenders Act 2012.”

 

That Act did not deal with the shortfall between solicitor and own client costs and recoverable costs, only the success fee. Any element of shortfall must still be the subject of detailed assessment.

 

Thus the Explanatory Note issued by the Ministry of Justice is wrong in that it is not permissible to use this new provision to charge the shortfall between solicitor and own client costs and recoverable costs; rather it is only the success fee or the damages-based agreement fee that can be charged to the client.

 

The New CPR

 

CPR 21.12 formerly dealt with the expenses, not the legal costs, of a litigation friend, although an After-the-Event insurance premium, generally considered to be part of the legal costs, was specifically classed as an expense of a litigation friend (CPR 21.12(2)(a)).

 

CPR 21.12 is now amended to include “costs” as well as expenses.

 

As amended CPR 21.12(6) and (7) provide that costs and expenses are separately recoverable out of damages, with each being limited to 25% of general damages, giving a total of 50% potentially deductible from a child’s damages.

 

Thus there is now a mechanism for the court to order payment of a success fee, or damages based fee, out of a child’s damages, without the need for detailed assessment.

 

New CPR 21.12(7) & (8) limit the amount that can be charged and also when the application can be made.

 

New CPR 21.12(7) reads:-

 

“(7) the amount which the litigation friend may recover under paragraph (1) in respect of costs must not (in proceedings at first instance) exceed 25% of the amount of the sum agreed or awarded in respect of—

 

  • general damages for pain, suffering and loss of amenity; and

 

  • damages for pecuniary loss other than future pecuniary loss, net of any sums recoverable by the Compensation Recovery Unit of the Department for Work and Pensions.”

 

The rule that the application can only be made after all costs recoverable for the other side have been dealt with is contained in new CPR 21.12(8) which reads:-

 

“(8) Except in a case in which the costs payable to a child or protected party are fixed by these rules, no application may be made under this rule for a payment out of the money recovered by the child or protected party until the costs payable to the child or protected party have been assessed or agreed.”

 

Thus it will also be seen that the new mechanism only applies to personal injury actions and that the Allowed Damages Pool is utilised and the total amount deducted from the client’s damages cannot exceed 25% of the Allowed Damages Pool, and it is only the success fee, not the balance between ordinary solicitor and own client costs and recoverable costs that can be the subject of these rules.

 

That is not the end of it.

 

The New Practice Direction

 

Any such claim must be supported by a Witness Statement from the litigation friend, and not the solicitor (CPR PD 21 11.2).

 

Here is a template letter:-

 

Dear Mrs Jones,

 

As you will be aware you are your little Danny’s litigation friend as well as his mum.

Please sign the attached Witness Statement so that I can have 25% of his damages.

 

Yours sincerely

 

Ivor Snowball-In-Hells-Chance

Solicitor

 

I will not set out the template reply from Mrs Jones, but it begins and ends with the letter F.

Sometimes the solicitor is the litigation friend.

 

That will be interesting. Let us assume that there is the odd – odd indeed – litigation friend who puts the solicitor’s interests above those of the child.

 

It does not stop there. Practice Direction 21 11.12 details with general principle of the litigation friend having to make a statement:-

 

“11.2. In all circumstances, the litigation friend must support a claim for expenses by filing a witness statement setting out –

 

  • the nature and amount of the expense; and

 

  • the reason the expense was incurred.”

 

Practice Direction 21 11.3 provides as follows:-

 

“Where the application is for payment out of the damages in respect of costs pursuant to Rule 21.12(1A) the Witness Statement must also include (or be accompanied by) –

 

  • a copy of the conditional fee agreement or damages-based agreement;

 

  • the risk assessment by reference to which the success fee was determined;

 

  • the reasons why the particular funding method was selected;

 

  • the advice given to the litigation friend in relation to funding arrangements;

 

  • details of any costs agreed, recovered or fixed costs recoverable by the child; and

 

  • confirmation of the amount of the sum agreed or awarded in respect of:

 

  1. general damages for pain, suffering and loss of amenity;

 

  1. damages for pecuniary loss other than future pecuniary loss net of any sums recoverable by the Compensation Recovery Unit of the Department for Work and Pensions.”

 

How ultra vires can you get?

 

This is very obviously ultra vires the Courts and Legal Services Act 1990, which requires neither a risk assessment in relation to Conditional Fee Agreements, nor an analysis of the law of funding.

 

Can a Practice Direction overturn centuries of legal professional privilege? I am told that this is the first time in English and Welsh history that a rule or more has required a witness statement in civil proceedings to disclose the advice given by a lawyer to her or his client.

 

Risk Assessment

 

The Civil Procedure Rules were amended in 2013 to remove the requirement to carry out the Risk Assessment. This followed Parliament approving the Conditional Fee Agreements Order 2013, which contains no reference to risk assessment as a basis of calculating the success fee.

 

CPR 46.9(4):

 

“(4) Where the court is considering a percentage increase on the application of the client, the court will have regard to all the relevant factors as they reasonably appeared to the solicitor or counsel when the conditional fee agreement was entered into or varied.”

 

That is the entirety of the Civil Procedure Rules dealing with success fees. (For a detailed analysis of the law relating to Conditional Fee Agreements see my blog Conditional Fee Agreements, Damages-Based Agreements and Contingency Fees.)

 

Any Senior Court will surely throw this Practice Direction out. So what then is the problem?

Well, once this obviously invalid Practice Direction is cast aside one is left with the existing law, which is that the matter is entirely within the discretion of the judge. Therein lies the problem. The judges are currently exercising this discretion by refusing to allow any deductions and that is why the rules and the Practice Direction now considered were written……..

 

Yet again the Rules Committee, whose proposal was rubber-stamped by Parliament, has wholly failed to understand how solicitors’ costs and solicitors’ practices work.

 

Here is how the new rule looks with effect from 6 April 2015, with tracked changes.

 

Expenses incurred by a litigation friend

 

21.12

 

(1)Subject to paragraph (1A), in proceedings to which rule 21.11 applies, a litigation friend who incurs costs or expenses on behalf of a child or protected party in any proceedings is entitled on application to recover the amount paid or payable out of any money recovered or paid into court to the extent that it –

 

(a) has been reasonably incurred; and

 

(b) is reasonable in amount.

 

(1A) Costs recoverable under the rule are limited to costs incurred by or on behalf of a child by way of success fee under a conditional fee agreement or sum payable under a damages-based agreement in a claim for damages for personal injury where the damages agreed or ordered to be paid do not exceed £25,000.

 

(2) Expenses may include all or part of –

 

(a) a premium in respect of a costs insurance policy (as defined by section 58C(5) of the Courts and Legal Services Act 1990); or

 

(b) interest on a loan taken out to pay a premium in respect of a costs insurance policy or other recoverable disbursement.

 

(3) No application may be made under this rule for costs or expenses that –

 

(a) are of a type that may be recoverable on an assessment of costs payable by or out of money belonging to a child or protected party; but

 

(b) are disallowed in whole or in part on such an assessment.

 

(

 

(Costs and expenses which are also “costs” as defined in rule 44.1(1) are subject to rule 46.4(2) and (3).)

 

(4) In deciding whether the costs or expenses were reasonably incurred and reasonable in amount, the court will have regard to all the circumstances of the case including the factors set out in rule 44.4(3) and rule 46.9.

 

(5) When the court is considering the factors to be taken into account in assessing the reasonableness of the costs or expenses, it will have regard to the facts and circumstances as they reasonably appeared to the litigation friend or to the child’s or protected party’s legal representative when the cost or expense was incurred.

 

(6) Subject to paragraph (7), where the claim is settled or compromised, or judgment is given, on terms that an amount not exceeding £5,000 is paid to the child or protected party, the total amount the litigation friend may recover under paragraph (1) must not exceed 25% of the sum so agreed or awarded, unless the court directs otherwise. Such total amount must not exceed 50% of the sum so agreed or awarded.

 

(7) The amount which the litigation friend may recover under paragraph (1) in respect of costs must not (in proceedings at first instance) exceed 25% of the amount of the sum agreed or awarded in respect of—

 

(a) general damages for pain, suffering and loss of amenity; and

 

(b) damages for pecuniary loss other than future pecuniary loss,

net of any sums recoverable by the Compensation Recovery Unit of the Department for Work and Pensions.

 

( (8) Except in a case in which the costs payable to a child or protected party are fixed by these rules, no application may be made under this rule for a payment out of the money recovered by the child or protected party until the costs payable to the child or protected party have been assessed or agreed.

 

It should be noted that CPR 21.12(2)(a) allows the recovery out of damages of an ATE premium incurred by a litigation friend and that can be done with little formality. The payment of a premium still needs to be justified but given the massive increase in court fees that came in on 9 March 2015 an ATE policy that includes own disbursements cover then became a lot more justified.

 

Even by the wretched standards of this wretched body this plumbs new depths. It may be that the Rules Committee intended to help by providing a summary assessment procedure but the conditions on it mean that it is worse than before and still leaves full discretion with the judge as to whether to award any success and that was the main problem under the old regime. This is particularly unfair as general damages were increased by 10% (Simmons v Castle [2012] EWCA 1288) to reflect the fact that a party would have the pay the success fee out of damages, so its lawyers should at least get that 10%. This apparent windfall for children is no such thing as in many instances solicitors will simply refuse to act for children.

 

In A & M (by their litigation friend) v Royal Mail Group (No 2) [2015] MISC B30 (CC)

District Judge Lumb, sitting in Birmingham County Court, was dealing with litigation expenses incurred by a litigation friend. The relevant rule is CPR 21.12.

Given the publicity that this decision, a first instance one binding on no one and logically flawed, it should be noted that this was not a solicitor and own client assessment and not a between the parties assessment and is very much confined to its own facts, that is dealing only with deductions from children’s damages.

The litigation friend, subject to any Solicitors Act 1974 Assessment, remains liable for the full cost and success fee agreed with the child’s solicitor. CPR 21.12 simply deals with what may be deducted from a child’s damages, not whether the legal fees are payable or not.

This was a fixed recoverable costs case and so between the parties costs were not an issue.
The infant claimants brought  personal injury claims through their litigation friend and damages were assessed and provisionally approved by the court subject to costs, specifically sums to be deducted from those damages.

In the initial judgment [2015] EW MISC B24 (CC) 14 August 2015 DJ Lumb indicated that he was not prepared to approve deduction of an ATE premium and was not prepared summarily to assess the success fee, nor have a detailed assessment.

He gave directions for summary assessment on paper, basically directing the claimants’ solicitors to file further documents explaining the figures involved.
The costs schedule for M’s claim was £4,682.44 of which profit costs were £3,003.70. The success fee claimed was 100%, thus also £3,003.70 but capped at 25% of damages.

As damages were £2,065.00 the actual total claimed was £516.25 including VAT and £430.21 exclusive of VAT amounting to a true success fee of 14.3%,  that being the uplift on base costs.

In relation to A the costs claimed were also £4,682.44 of which profit costs were £3,045.15, but capped at 25% of damages. As damages were £2,115.00 the actual total claimed was £528.00 including VAT,  that is £440.63 excluding VAT and therefore amounting to a true success fee of 14.47%.

DJ Lumb described it as “patently absurd that anyone should pursue damages claims totalling £4,180.00 at a risk of having to pay £6,432.04 in doing so.”

He also noted that while the retainer documentation suggested an exclusion of the protection under section 74 (3) of the Solicitors Act 1974, according to the judge it did not appear that the litigation friend realised that he was giving up those rights. The judge suggested that that might be relevant in a Solicitors Act 1974 solicitor and own client assessment.

I have no idea whether on the facts of this case that is correct or not, but a properly worded retainer does involve the litigation friend, or client, agreeing an hourly rate and the Senior Courts Costs Office will not interfere with that rate.

The judge said that under CPR 21.12:-

“Simply because an ill-informed litigation friend signs up to a CFA with a success fee of 100% does not automatically mean that a 100% success fee is a reasonable expense for the purposes of CPR 21.12.”

That must be right.

However, as we have seen, the true success fees here were a fraction of that being between 14% and 15%.

The judge said that the court had to look at all of the circumstances in judging what was a reasonable success fee, but in fact he then looked only at risk, and assessed the success fee at 5%. He added 5% for postponed receipt of costs,  that is the fact that unlike in other litigation a solicitor does not get paid anything until the end of the case.
Coincidently or not that gave a total success fee of 10%, the “bonus” that clients get under Simmons v Castle in return for the non-recovery of the success fee post Jackson.
Actually it is not. The 10% is an uplift on damages; here the costs uplift was 10%, not the damages cap.

In each case the success fee sought was 100% of profit costs capped at 25% of damages, which was not a smart move by the solicitors in a case involving children.

For the purposes of CPR 21.12 the judge assessed base costs as the success fee and it is, by law, a percentage uplift on those base costs and reduced them notionally, purely for the purposes of calculating the success fee base, by 60%.

Again that must be right. However it is important to note that the reduction was purely notional in order to calculate the deduction of costs from the child’s damages. It does not affect the sum due from the litigation friend.

Given that many judges, rightly or wrongly, are point blank refusing to allow any deductions from a child’s damages by way of costs, DJ Lumb was actually relatively generous in this case, not something that you will have gleaned from the less well informed of the legal media.

I will not bother to comment on the judge’s other remarks concerning the method of having a success fee and then capping it by reference to damages.

Parliament has approved that scheme, Parliament has specifically allowed contingency fees to continue in personal injury work, as compared for example with employment work, and Parliament has specifically sanctioned a 25% deduction of damages by way of a Damages-Based Agreement.

I have only bothered to write this case up because of the attention it has received elsewhere and I want to correct the impression that has been created.

In fact this is a case of no significance whatsoever.

 

NAMING THE DEFENDANT

 

In Engeham v London and Quadrant Housing Trust & Another [2015] EWCA Civ 1530

 

the Conditional Fee Agreement, under the heading “What is covered by this agreement” said:-

 

“Your claim against the defendant L & Q for damages”.

 

In fact proceedings were issued against both L & Q and the Academy of Plumbing Ltd (APL) and was settled by a “Tomlin” order, the relevant terms of which read:-

 

“2.      [APL] do pay the Claimant’s costs of this action, such costs to be assessed on a standard basis by way of detailed assessment if not agreement.

 

  1. Upon payment by [APL] of the agreed sum and costs, [L & Q and APL] be discharged from all further liability to the Claimant in respect of the claims made by the Claimant in this action.

 

Schedule

 

  1. The Claimant has agreed to accept the sum of £10,000 plus costs in full and final settlement of the claims brought in this action.

 

  1. The sum of £10,000 be paid by [APL] to the Claimant’s solicitors by 4 pm on 26 July 2011.”

 

I deal with the issue of a win below but in relation to the named defendant both courts below held that Ms Engeham could not recover any costs in relation to the action against APL as the words in the Conditional Fee Agreement quoted above “were not wide enough to encompass an action against anybody else.”

 

That matter was not before the Court of Appeal as Ms Engeham did not pursue that point but the court confirmed the correctness of the lower courts’ decision:-

 

“On this further appeal, Ms Engeham does not seek to challenge those conclusions, and I consider that she was right to do so. It follows, that the only costs which she can now recover are costs which relate to her action against L & Q.”

 

Thus naming a defendant means that costs cannot be recovered in relation to work against any other party and thus it remains crucial not to name the defendant in any Conditional Fee Agreement – see my post CFAs: Never Name the Defendant! (1)

 

This case thus follows the reasoning in

 

Brookes v DC Leisure Management Ltd and Technogym UK Ltd [2013] EW Misc 17 (CC) Exeter County Court

 

dealt with in my post referred to above.

 

Win

 

What the Court of Appeal was actually considering here was whether the outcome of the action represented a win for the claimant Ms Engeham under the terms of the Conditional Fee Agreement.

 

The Principal Costs Officer and Master Haworth held that it was not a win, but on further appeal HH Judge Mitchell sitting with Master Hurst, Senior Costs Judge, held that it was a win and APL now appealed against that decision, seeking to restore the order of the first two courts.

 

The definition of a win was the one contained in both the Underwoods Model Conditional Fee Agreement and the Law Society Model Conditional Fee Agreement:-

 

“Your claim for damages is finally decided in your favour, whether by a court decision or an agreement to pay you damages or in any way that you derive benefit from pursuing the claim.

 

‘Finally’ means that your opponent:-

 

  • is not allowed to appeal against the court decision; or

 

  • has not appealed in time; or

 

  • has lost any appeal.”

 

APL argued that Ms Engeham had not won against L & Q and as they were the only defendant named in the Conditional Fee Agreement she had not won anything under that agreement and so was not bound to pay her solicitors anything and under the indemnity principle she could not recover costs from anyone in respect of her non-existent liability to pay costs.

 

Here the terms of the Tomlin order provided for payment of damages by APL but that such payment acted as a discharge for both L & Q and APL.

 

The Court of Appeal upheld the decision of HH Judge Mitchell that APL were liable for the costs of Ms Engeham’s action against L & Q.

 

The court pointed out that as far as Ms Engeham was concerned the object was to obtain damages for her injuries. She had done that. She had won. True it was that the action against L & Q was not finally decided in her favour by an agreement to pay her damages if one read into the Conditional Fee Agreement a clause that it must be L & Q who actually pay the damages, but there was no reason to do so.

 

As the court said:-

 

“It frequently occurs that a settlement is achieved with an action, but the person who pays the damages is not the defendant who is being sued.”

 

The Court of Appeal said that the parties could not have contemplated “that a win was restricted to causing L & Q to be the payer, even if L & Q was the only anticipated defendant at the date of the CFA. I therefore consider that the “win” clause in the CFA is not limited by reference to the identity of a person who actually pays the damages. Once one construes the CFA in that way, it seems to me that the Tomlin order is plainly an agreement to pay damages within the meaning of the CFA. The fact that those damages were to be paid by APL and not L & Q is not relevant.”

 

The Court of Appeal also pointed out that had Ms Engeham just sued L & Q and L & Q had brought Part 20 proceedings against APL, who then made payment in an overall settlement, she would have won against L & Q.

 

The court said:-

 

“Other examples abound, such as a parent or a related company, a shareholder or a simple well-wisher making the payment of damages.”

 

That is perhaps not a valid point – the “win” would still have been against the named defendant, whoever actually paid the damages. The argument here was that there had not been a win within the proceedings against the named defendant.

 

Comment

 

This is a very fact specific case. A differently worded Tomlin order may have resulted in Ms Engeham recovering no costs. As Simon Gibbs says in his always excellent blog – Wrong defendant named in CFA – again:-

 

“The important point to note is that for many – probably most – cases where the wrong defendant is named, this decision will be of no assistance.  The Court of Appeal has recognised that expressly naming one party as defendant in a CFA limits the scope of what the agreement covers.  Perhaps the classic example of this problem arises where a CFA in a highway tripping claim names a local authority as defendant but it is subsequently discovered the correct defendant is actually another party (eg utilities company), with the claim then being successfully pursued against that other party.  Ordinarily, and absent a rather unusual final costs order, there will be no recoverable costs given the limitation of the CFA.”

 

As the High Court said in

 

Law v Liverpool City Council [2005] EWHC 90020 (Costs):-

 

“If the CFA as drafted is such that it can include a claim against any potential Defendant, then the present problem would not arise.”

 

In Brierley v Prescott [2006] EWHC 90062 (Costs)

 

the High Court said that it is commonly the case that Conditional Fee Agreements do not identify the opponent and that there is no requirement that they should, provided that “the particular proceedings” to which they relate are specified. The court said:-

 

“…the sin therefore was one of addition: including an unnecessary detail.”

 

As stated in my post – Conditional Fee Agreements, Damages-Based Agreements and Contingency Fees:-

 

“The key lesson to be drawn from these cases is that the defendant should never be mentioned in a Conditional Fee Agreement, but rather simply the date of the accident, and possibly the rough location, so that “the particular proceedings” are specified.”

 

The decision in Engeham has been widely misreported, as pointed out by Simon Gibbs. I suspected that that was the case and as I said in my post:-

 

“I have not yet got the full Judgment and my advice remains that you should not name the defendant in a Conditional Fee Agreement.”

 

That advice is reinforced, not changed, by the Court of Appeal’s decision in this case.

 

Four courts had previously reached four different conclusions in cases where the wrong defendant has been named in a conditional fee agreement; what all four decisions have in common is that each states that there is never any need to name a defendant and doing so risks all costs being lost.

 

In Hailey v Assurance Mutuelle Des Motards SCCO: CCD 1405291

 

the Senior Court Costs Office held that if the wrong defendant was not named in a Conditional Fee Agreement then there was no valid retainer and thus the indemnity principle meant that no costs could be recovered.

 

However the court held that disbursements could be recovered as these were payable by the claimant in any event, win or lose.

 

I do not pretend to understand the logic of this decision. The claimant won and therefore there must have been an implied term that he would pay his lawyers in the circumstances. Either the retainer is invalid in which case nothing is recoverable, or it is valid, in which case disbursements and costs were both recoverable.

 

There can be no logic in holding the retainer valid in relation to disbursements but not valid in relation to costs. If there was no retainer because there was no successful action against the driver of the motorcycle then clearly disbursements in relation to a completely different matter, which the court found this was, against the insurer could not be covered by that retainer.

 

Here the accident had occurred in France and thus the action, under French and apparently European Union Law, was against the insurer and not the driver of the motorcycle; the Conditional Fee Agreement wrongly named the driver rather than the insurance company and that part of the claim had been struck out.

 

Nevertheless it was the same accident which occurred on the same date.

 

In Brierley v Prescott [2006] EWHC 90062 (Costs)

 

the Conditional Fee Agreement covered:-

 

“Your claim against Hertz UK Limited Car Hire for damages for personal injury suffered on 7 January 2000”

 

where the true defendant should have been the other driver, a Mr Prescott. There Master Gordon-Saker said:-

 

“In my view the words “your claim against Hertz UK Limited Car Hire for damages for personal injury suffered on 7 January 2000” meant “the claim for damages arising out of the accident and which was being handled by Hertz”. “

 

He also said that the intention of the parties was obvious and that there was only ever one claim and therefore he held that the Conditional Fee Agreement was binding and the claimant was bound to pay his own solicitors under that agreement which meant that he could recover those costs from the defendant.

 

That decision is far better reasoned and clearly gives intention to the will of Parliament.

 

Simon Gibbs appeared for the defendant in each case and in Brierley v Prescott Simon Gibbs conceded that if the agreement had been expressed to cover “your claim for damages for personal injury suffered on 7 January 2000” without identifying the opponent, he would have no argument.
The court there said that it is commonly the case that Conditional Fee Agreements do not identify the opponent and that there is no requirement that they should, provided that “the particular proceedings” to which they relate are specified. As the court said “the sin therefore was one of addition: including an unnecessary detail.”

 

The key lesson to be drawn from these cases is that the defendant should never be mentioned in a Conditional Fee Agreement, but rather simply the date of the accident, and possibly the rough location, so that “the particular proceedings” are specified.

 

In that case the claimant and his solicitor had sought retrospectively to replace the 2002 agreement with one in 2005 but backdated. The court had this to say about that:-

 

“Although this is perhaps not the right vehicle to decide the point, I think it likely that a conditional fee agreement can have retrospective effect. However for the reasons suggested by Colman J in Arkin v Borchard Lines Ltd (Costs Judgment) [2001] NLJR 970, an agreement made after the conclusion of the proceedings to vary a conditional fee agreement relating to those proceedings would be unenforceable as contrary to public policy.”

 

In Law v Liverpool City Council [2005] EWHC 90020 (Costs)

 

the court also said that there was no requirement to name a defendant. There, Liverpool City Council were named as the defendant but in fact the property concerned, where the injury took place, had been transferred to Berrybridge Housing Association just two months before the accident. They were not named in the Conditional Fee Agreement. There the court held that there was a retainer, allowing the claimant to recover base costs but that there was no valid Conditional Fee Agreement, as the claim was not against Liverpool City Council, and therefore no success fee could be recovered.

 

The court said:-

 

“If the CFA as drafted is such that it can include a claim against any potential Defendant, then the present problem would not arise.”

 

It also said:-

 

“In my judgment, when it became apparent that the second defendant needed to be added the claimant and the solicitor should have considered the point and if it was the intention of both of them to have a CFA as well as a retainer covering the second defendant then a fresh CFA agreement should have been entered into or the existing one properly varied in writing and signed. This should have been effected.” (Paragraph 22).

 

In Brookes v DC Leisure Management Ltd and Technogym UK Ltd [2013] EW Misc 17 (CC) Exeter County Court considered a case where the CFA stated that it covered:-

 

“Your claim against Exeter City Council for damages for personal injury suffered in an accident at work on or about 19 May 2006”.

 

In fact the true defendants were DC Leisure Management Ltd and Technogym UK Ltd.

 

Yet again the court pointed out that it was unnecessary to name any defendant at all:-

 

“The claim could have been defined in relation to the date of the accident only, but the naming of a particular defendant evidences a clear intention to identify a particular legal claim against a particular Defendant.”

 

“Although the statutory requirement is that the CFA must be in writing, it does not have to identify the Defendant.”

 

In that case the court upheld the decision of Master Gordon-Saker sitting in the Senior Courts Costs Office that no costs would be recovered.

 

Thus on virtually identical facts we now have the following conflicting decisions:-

 

  1. All costs can be recovered (Brierley v Prescott).

 

  1. Base costs, but no success fee can be recovered (Law v Liverpool City Council).

 

  1. Disbursements only can be recovered (Hailey v Assurance Mutuelle Des Motards).

 

  1. Nothing can be recovered (Brookes v DC Leisure Management Ltd).

 

That is four different possibilities on the same facts. The ingenuity of the courts knows no bounds. I wonder how many further variations they can come up with.

 

For the sake of completion in the case of Scott v Transport for London (2009) Hastings County Court 23 December 2009 unreported the court allowed an appeal against the decision of the District Judge who had refused to allow any costs in relation to a Conditional Fee Agreement referred to “your claim against Lambeth Council” when in fact the defendant was Transport for London. Thus the County Court allowed costs in full as did the court in Brierley v Prescott.

 

Insofar as anything is clear from these decisions it is that you should never name a defendant in a Conditional Fee Agreement.

 

None of these problems are avoided by the fact that the Conditional Fee Agreement is a post 31 March 2013 one where the success fee is not recoverable from the other side. The central point in all of the above cases is that the retainer was invalid, in full or in part, and thus the claimant, that is the person entering into the Conditional Fee Agreement, was not liable to pay their own solicitors because of the defective retainer and therefore because of the indemnity principle those costs could not be recovered from the other side.

 

Exactly the same principle applies where the success fee is not recoverable, that is that if the claimant is not liable to pay it to the solicitor then obviously the solicitor cannot charge the success fee to the client. As we have seen above there is also the risk that the defendant will be off the hook in relation to base costs as the only retainer is the potentially defective Conditional Fee Agreement.

 

In Cox v Woodlands Manor Care Home [2015] EWCA Civ 415

 

the Court of Appeal held that where a contract had been made at a client’s home and the notice provisions of the Cancellation of Contracts made in a Consumer’s Home or Place of Work etc. Regulations 2008 had not been complied with then there could be no recovery of costs from the other side.

 

This was because the client was not liable to pay her own solicitor and under the indemnity principle, now contained in Section 60(3) of the Solicitors Act 1974 there can be no recoverability of a liability not due from the client.

 

The 2008 Regulations have now been replaced by the 2013 Regulations but the principles are the same.

 

NON PERSONAL INJURY CASES

 

It will be seen that the new procedure only covers cases up to £25,000 and in personal injury, what about other cases?

 

Liverpool and Manchester County Courts take the view that there is no power to allow deduction of a success fee in a case involving a minor at an infant approval hearing.

 

Rather the issue must be considered only at a detailed assessment hearing.  

 

Re HHJ Halbert, Liverpool and Manchester

 

In an Infant Approval Settlement Hearing in Crewe County Court DJ Wallace refused to order the payment of a success fee from the child’s damages.

 

On appeal HHJ Halbert, in a telephone conversation, took the view that DJ Wallace had no discretion concerning the success fee as Parliament had determined that this be paid by the Claimant, but he did have a discretion in relation to the approval of the settlement.

 

Attempts to resolve the matter between HHJ Halbert and DJ Wallace failed and HHJ Halbert, although of the view that the success fee should be taken from the child’s damages – otherwise children would be unrepresented – held that the Claimant’s solicitors had no locus, that is no standing to appeal.

 

Senior Costs Judge Peter Hurst suggested that the appropriate course was to apply for assessment of the bill under section 70 of the Solicitors Act 1974 and that has now happened.

 

It is important to remember that no deduction of any kind may be made from a child’s damages, whether by a litigation friend or anyone else, without a court order and there must always, without exception, be an infant approval hearing.

 

Parental indemnities should never be entered into and the courts have made it clear that they regard that as a serious disciplinary matter. One of the key functions of the court is to protect those lacking capacity and they rightly guard that function jealously.

 

It is acceptable for the solicitor to have a separate agreement with the litigation friend, thus leaving the litigation friend to make the application. S/he then has an incentive to do so.

 

If the agreement is made directly between the solicitor and client, even if entered into by the litigation friend as agent, then the litigation friend has no incentive to make the application which will purely benefit the solicitor and disadvantage the minor. That is what is required by the new rules.

 

There is no reason for the litigation friend to be involved in signing the CFA if the infant is capable of understanding it, as a CFA, or any other contract for legal services, is a contract for necessaries. The courts have held that in such circumstances the litigation friend is simply acting as the agent of the child – see for example Dunn v Mici [2008] EWHC 90115 (Costs).

 

If the litigation friend is prepared to pay the solicitor’s fee without deducting it from the child’s damages then that is, from the lawyer’s point of view, acceptable.

 

Personal Injury Exceptions

 

Articles 4 and 5 do not apply to any Conditional Fee Agreement entered in to in relation to proceedings relating to a claim for damages in respect of diffuse mesothelioma. (Article 6(2)(a)) of this Order and Article 4(a) of The Legal Aid, Sentencing and Punishment of Offenders Act 2012 (Commencement No 5 and Saving Provision) Order 2013.

 

In such proceedings the success fee remains recoverable and is not limited by reference to damages.

 

The Government’s attempt to abolish recoverability in mesothelioma cases was successfully judicially reviewed in R (Whitson, Asbestos Victims Support Groups Forum UK) v The Secretary of State for Justice and Association of British Insurers [2014] EWHC 3044 (Admin) 2 October 2014.

 

The Government has now announced that it will not appeal against the decision and will not seek to end recoverability.

 

Other Exceptions

 

In relation to the exceptions set out below, the success fee remains recoverable. In simple terms insolvency, defamation and privacy claims carry on as before.

 

Exempted from the scope of the Order are:-

 

  • defamation;

 

  • malicious falsehood;

 

  • breach of confidence involving publication to the general public;

 

  • misuse of private information;

 

  • harassment, where the defendant is a news publisher.

 

“News publisher” means a person who publishes a newspaper, magazine or website containing news or information about or comment on current affairs.

 

(Article 6(2)(b) and Article 1 of this Order and Article 4(b) of The Legal Aid, Sentencing and Punishment of Offenders Act 2012 (Commencement No 5 and Saving Provision) Order 2013.)

 

Also exempted are:-

 

(c) proceedings in England and Wales brought by a person acting in the capacity of –

 

(i) a liquidator of a company which is being wound up in England and Wales or Scotland under Parts IV or V of the 1986 Act; or

 

(ii) a trustee of a bankrupt’s estate under Part IX of the 1986 Act;

 

(d) proceedings brought by a person acting in the capacity of an administrator appointed pursuant to the provisions of Part II of the 1986 Act;

 

(e) proceedings in England and Wales brought by a company which is being wound up in England and Wales or Scotland under Parts IV and V of the 1986 Act; or

 

(f) proceedings brought by a company which has entered administration under Part II of the 1986 Act.

 

(Article 6(2)(c-f) and Article 1 of this Order and Article 4(c – f) of The Legal Aid, Sentencing and Punishment of Offenders Act 2012 (Commencement No 5 and Saving Provision) Order 2013.

 

References to the 1986 Act are to the Insolvency Act 1986.

 

In a written Ministerial Statement on 26 February 2015 the government announced that success fees and after-the-event insurance premiums will remain recoverable in insolvency proceedings (Parliament: UK: House of Commons: Written Statement: HCWS, 26 February 2015).

 

In Stevensdrake  Ltd v Hunt and Others [2015] EWHC 1527 (Ch)

 

the Chancery Division of the High Court held that a liquidator was personally liable for the costs of the solicitors that he instructed under a Conditional Fee Agreement to act on a misfeasance claim against the former administrators of the company in liquidation.

 

The court rejected the liquidator’s argument that, as a matter of principle, he could only contract on behalf of the company to which he was appointed, so that he was only liable to pay costs to the extent that there were funds available in the insolvent estate.

 

The court held that the wording of the CFA, which stated that the liquidator would be “personally responsible” for the costs arising under it made it clear that the liquidator was contracting in his personal capacity.

 

The court made this decision in spite of the fact that there was some evidence that the parties intended or accepted that recovery of costs would be limited by the funds available in the liquidation estate. The clear wording of the CFA, which did not support that view, prevailed.

 

In the matter of Hartmann v Capital Ltd [2015] EWHC 1514 Ch

 

the Chancery Division of the High Court held that Investment Bank Special Administrators under the Investment Bank Special Administration Regulations 2011 could not take advantage of the LASPO exception that allows continuing recoverability of success fees and ATE premiums in insolvency proceedings.

 

This is because that exception in this context applies only to administrators appointed under Part II of the 1986 Act (Article 4 Legal Aid, Sentencing and Punishment of Offenders Act 2012 Commencement no. 5 and Saving Provisions (Order) 2013).

 

Administrators appointed under the 2011 Regulations do not fall within that exception.


 

Timescale

 

The test in an individual Conditional Fee Agreement is the date of “entering into” the agreement.

 

Provided that the agreement was entered into on or before 31 March 2013, then provided that it was entered into specifically for the purposes of the provision to a person of advocacy or litigation services in connection with the matter which is the subject of the proceedings, the old regime applies, that is the success fee is recoverable and is not limited by reference to damages. (Article 6(1)(a)).

 

COLLECTIVE CONDITIONAL FEE AGREEMENTS

 

The difference between Collective Conditional Fee Agreements and individual Conditional Fee Agreements is that there is just one Collective Conditional Fee Agreement and that stays in place to cover new cases as and when they come in.  Thus the relevant Collective Conditional Fee Agreement may well be before April 2013 but cover cases that arise post-April 2013.

 

Parliament did miss this to begin with and some of us pointed out that it was not sufficient just to rely on the agreement being pre-April 2013; if that was the case then recoverability would go on for ever in such cases.  This was picked up by Parliament which amended the Regulations before passing them in their final form.

 

Thus in relation to Collective Conditional Fee Agreements there must have been provision to a person of advocacy or litigation services under the agreement in connection with those proceedings (my Italics) on or before 31 March 2013. (Article 6(1)(b) of the Conditional Fee Agreements Order 2013.)

 

What Article 6(1)(b) requires is that for the success fee to be recoverable some actual work must have been done on the actual case prior to 1 April 2013.  If that is the case then all future work is covered and will be the subject of a recoverable success fee.

 

Article 6 of the Conditional Fee Agreements Order 2013, reads where relevant, as follows:

 

“6. (1) Articles 4 and 5 do not apply to a conditional fee agreement which is entered into before the date upon which this Order comes into force if—

 

  • the agreement was entered into specifically for the purposes of the provision to a person (“P”) of advocacy or litigation services in connection with the matter which is the subject of the proceedings; or

 

  • advocacy or litigation services were provided to P under the agreement in connection with those proceedings before that date.”

 

The date upon which the order came into effect was 1 April 2013.

 

Thus there must either have been an agreement entered into specifically for providing advocacy or litigation services in connection with that matter or such actual services must have been provided under the agreement before that date.
Thus 6(1)(a) covers a case where the cause of action arose before 1 April 2013 but no actual work was done, but nevertheless an agreement was entered into specifically for that particular case with that particular person.

 

(6)(1)(b) covers collective Conditional Fee Agreements and provides that actual work must have been done before 1 April 2013.

 

Either which way there can be no recoverability in relation to an ordinary civil matter where the cause of action arose after 31 March 2013. This is because obviously it would be impossible to enter into an agreement by that date specifically for the purposes of providing to a specific person in connection with a specific matter advocacy or litigation services where the event has not occurred, unless you are clairvoyant of course.

 

Likewise under (b) there must have been actual work in relation to “those proceedings” before 1 April 2013, which again is impossible if the cause of action had not arisen.

 

The Explanatory Note, which does not form part of the Order, but must be taken into account by a court states:

 

Article 6 contains a transitional and saving provision. The effect of the transitional provision is to provide that articles 4 and 5 do not apply to a CFA entered into in respect of a claim for personal injuries, or to a collective CFA under which advocacy or litigation services are provided to a person in respect of that claim, before the day on which these regulations comes (sic) into force.”

 

This confirms that with a collective CFA there needs to have been advocacy or litigation services provided to a person in respect of that claim before 1 April 2013.

 

Under new CPR 44.17 inserted by The Civil Procedure (Amendment) Rules 2013 a person who has entered in to a CFA with a recoverable success fee is not subject to Qualified One Ways Costs’ Shifting (QOCS).  Neither is such a person entitled to the 10% general damages uplift under Simmons v Castle [2012] EWCA 1288 (second judgment).

 

This applies to Collective Conditional Fee Agreements in the same way as it applies to individual Conditional Fee Agreements.

 

Retrospective Collective Conditional Fee Agreements

 

In Pentecost v John [2015] EWHC 1970 (QB)

 

The Queen’s Bench Division of the High Court held that a retrospective Collective Conditional Fee Agreement was valid as between client and solicitor and could therefore justify recovery of costs, including a success fee, from the other side.

 

It was accepted that if in any given case the paying party can establish that the contract of retainer between the receiving party and his legal adviser’s is unenforceable then he can in turn take advantage of that by resisting any application against him to pay any costs incurred under such a retainer. That is the effect of the indemnity principle.

 

Here the paying party relied on the fact that the CCFA did not state the percentage uplift after 2 July 2009 and therefore no costs could be recovered from that date onwards. This is because section 58 of the Courts and Legal Services Act 1990 requires a Conditional Fee Agreement to state the percentage by which the amount of the fees would be payable if it were not a Conditional Fee Agreement is to be increased…

 

There was an original valid and enforceable CCFA and at first instance the Master held that the second CCFA running from July 2009 superseded the earlier CCFA and therefore from that date onwards no costs were recoverable.

 

On appeal Chief Master Gordon-Saker held that in fact the terms of the second agreement applied retrospectively to bring within its scope all pre-existing written statements of success fees and was thus compliant with the requirements of section 58 of the Courts and Legal Services Act 1990.
This followed the decision in Forde v Birmingham City Council [2009] 1 WLR 2732 where the court held that section 58 of the 1990 Act made no provision prohibiting retrospective conditional fee arrangements and such a prohibition should not be implied.

 

The retrospectivity was achieved by paragraph 2.3 of the second CCFA which read, where relevant:-

 

“This agreement applies to all claims for personal injury… conducted by the solicitors for members of the Union including clinical negligence claims… where there were instructions in respect thereof where first received before, on or after the date of this agreement.”

 

There was no requirement to repeat the provision of information already provided. The second CCFA applied retrospectively. It is thus capable of being complied with retrospectively.

 

Some problems

 

The Order will lead to significant and unnecessary problems.

 

MINORS

 

A minor who has entered in to a CFA through a Litigation Friend prior to 1 April 2013 will recover the success fee for work done during his or her minority.  However if the minor becomes 18 years old after 31 March 2013, then the new CFA which he or she must enter in to will not be able to have a recoverable success fee and thus only in relation to work done up to the claimant’s 18th birthday will the success fee be recoverable.

 

Thus the extent to which the success fee will be recoverable will depend upon the claimant’s age at the time of the accident.

 

In practice carry out all possible work at all possible speed so that as little work as possible is done after the claimant’s 18th birthday so as to minimize work carrying a non-recoverable success fee.

 

Once a minor achieves his or her majority the role of the Litigation Friend falls away, and on the face of it so does the conditional fee agreement signed by the Litigation Friend.

 

Two potential consequences flow from this:

 

 

  • that the retainer runs only from the date of the new conditional fee agreement, leaving the solicitor with an indemnity issue in relation to costs incurred before that date.

 

This would penalize a child for being a child on 31 March 2013, as a claimant who was an adult on 31 March 2013 would have no such problem.

 

It would also give an entirely unwarranted windfall to the tortfeasor.

 

To rub salt in to the wound the claimant would not get QOCS protection because at some stage there had been a conditional fee agreement with a success fee; for the same reason it is arguable that the claimant cannot get the 10% Simmons v Castle [2012] EWCA 1288 general damages uplift.

 

It remains to be seen how the courts will treat such cases.  My view is that they will work hard to allow recoverability of the success fee and recovery of costs back to the beginning of the case.

 

This may be achieved by allowing the claimant to adopt the contract, or by holding that the Litigation Friend acted as agent for the minor, a minor of course being allowed to enter into a contract for necessities, which surely a conditional fee agreement for legal services must be.

 

Although it was not the main issue in the case, this was the conclusion reached in Dunn v Mici [2008] EWHC 90115 (Costs), where the Supreme Court Costs Office was considering the validity of a conditional fee agreement under the 2000 Regulations, which imposed heavy regulatory burdens upon solicitors in conditional fee cases and which have long since been repealed. The defendant’s argument was that the claimant’s solicitor had failed to comply with the Conditional Fee Agreement Regulations 2000 and that by operation of the indemnity principle, under which only those costs which a receiving party is liable to pay his own solicitors are recoverable from a paying party, there were no costs to indemnify and therefore the losing defendant’s liability was nil.

 

As the claimant had been a minor when the conditional fee agreement was entered into, it had been signed by his mother. At paragraph 20 of the judgment the court said:-

 

“…a principal can act through an agent; here, the principal was Mr Dunn and his mother was his agent. Second, there was no requirement for a litigation friend to be appointed. This would only have been obligatory on the issue of proceedings had Mr Dunn then been a minor, but by that date, he had already attained his majority.”

 

Solution

 

Amend the Conditional Fee Agreements Order 2013 by inserting new Article 6(2)(g)

 

“(g)        proceedings brought by a person who was under 18 years of age as at 1 April 2013 and where a Litigation Friend entered in to a conditional fee agreement on behalf of that person before 1 April 2013.”

 

 

CHANGE OF SOLICITOR

 

A similar problem exists in relation to a change of solicitor after 31 March 2013 – may the CFA be assigned after that date with the success fee recoverable for all work done, or will the success fee only be recoverable on pre-assignment/pre new CFA work?

 

In practice this is likely to be a major issue as many personal injury firms will close and the files will be transferred to other solicitors. If the old firm continues to exist, then the case could be dealt with on an agency basis, with the original CFA being preserved. That will not work if the original firm has ceased to exist.

 

 

CAPACITY

 

A contract between a patient lacking capacity and his solicitor is generally a voidable, not void contract, and while it is sensible to ensure that both the claimant/patient and the litigation friend sign any conditional fee agreement, making them jointly and severally liable under the agreement, it is not fatal to the agreement if only the claimant/patient has signed.

 

Any challenge by a paying party that the conditional fee agreement is void as between solicitor and client should fail.  Of course if the contact is void then due to the indemnity principle there is no liability on the paying party for costs.

 

In the case of contracts other than for necessaries, the general rule is that a person who is lacking mental capacity is bound by his contract unless he can show both that the lack of capacity meant that he did not understand what he was doing and that the other party was aware of the lack of capacity.

 

If the patient can satisfy these two conditions, then the contract is voidable at his option.

 

This rule was laid down in

 

Imperial Loan Co Ltd v Stone (1892) 1 QB 599 where the court said:

 

“When a person enters into a contract and afterwards alleges that he was so insane at the time that he did not know what he was doing, and proves the allegation, the contract is as binding on him in every respect, whether it is executry or executed, as if he had been sane when he made it, unless he can prove further that the person with whom contacted knew him to be so insane as not to be capable of understanding what he was about”.

 

“The validity of a contract entered into by a lunatic who is ostensibly same is to be judged by the same standards as a contract by a person of a sound mind, and is not voidable by the lunatic or his representatives by reason of unfairness unless such unfairness amounts to equitable fraud which would have enabled the complaining party to void the contract even if he had been sane”.

 

This view was confirmed more recently in

 

Special Trustees for Great Ormond street v Ruskin and Others, High Court, 19 April 2000.

 

Assuming that the solicitor entering into the conditional fee agreement was aware of the client’s lack of capacity, then the contract is potentially voidable, but not void.

 

However, even assuming that the paying party can establish that the claimant lacked capacity to enter into a conditional fee agreement, the contract is still binding upon the claimant/patient but potentially voidable at his or her election.

 

This paying party has no standing to interfere with that legal position and has no power to argue that the claimant/patient should be required to void the contract.

 

In Forde v Birmingham City Council [2009] EWHC 12 (QB)

 

the court was considering the status of a potentially voidable conditional fee agreement retainer where undue influence was alleged.

 

There, the court said:

 

“But an agreement obtained by the exercise of undue influence is voidable, not void.  It remains in effect unless the person influenced seeks to set aside the contract and the court allows her to do so; such relief may be given on terms, e.g. as to payment of a reasonable sum for services actually rendered: Johnson v EBS Pensioner Trustees Ltd [2002] Lloyds Rep PN 309, paragraphs 76-80 and O’Sullivan v Management Agency and Music Ltd [1985] QB 429.  There is no evidence that Miss Forde had done anything to avoid CFA2.  On the contrary she has consented to these proceedings being brought by McGrath on her behalf.  What the council cannot do is to purport to avoid CFA2, to which it is not a party, on her behalf and in defiance of her wishes; nor is the court required to proceed on the basis that she has avoided it when she has not”.

 

Thus a conditional fee agreement made with a patient, and which has not been voided by the patient, remains enforceable and thus the paying party is bound to meet any costs order within the indemnity principle and has no standing to challenge the validity of the conditional fee agreement.

 

 

CAPACITY AND CFAs

 

In Blankley v Central Manchester and Manchester Children’s University Hospital NHS Trust [2015] EWCA Civ 18

 

the Court of Appeal upheld the High Court’s decision that a solicitor’s retainer had not been terminated by frustration when the client became mentally incapacitated and unable to give instructions.

 

The practical effect is that if a client loses mental capacity after a Conditional Fee Agreement has been entered into then there is no need to enter into a new retainer with the litigation friend or deputy. All the costs, past and future, will still be recoverable under the original Conditional Fee Agreement.

 

The principle applies to all retainers but it is of key relevance in relation to pre 1 April 2013 Conditional Fee Agreements as it means that recoverability of the success fee from the losing party is maintained; if a new post 31 March 2013 Conditional Fee Agreement was necessary then recoverability would be lost.

 

Where a client loses capacity the retainer is suspended, not frustrated, and thus can still be relied upon in maintaining the right to be paid and thus to recover costs from the other side, provided that a litigation friend is appointed within a reasonable time. The court did not state what a reasonable time is, so the clear advice is to appoint as soon as possible.

 

The case is also authority for the proposition that a litigation friend can effectively adopt an existing retainer; no new one is needed.

 

The decision also confirms that even without capacity the liability to pay costs rests with the litigant, not the litigation friend, in the absence of any separate agreement to the contrary.

 

Even if the client lacks capacity when the retainer is entered into, that retainer is still with the litigant and not litigation friend, who is merely the statutory agent of the incapacitated litigant and not a principal to the contract.
The decision casts considerable doubt on the rationale of Yonge v Toynbee [1910] 1 KB 215 that the loss of mental capacity of the principal ends an agent’s authority, although the court here held it unnecessary to rule on that point.

 

The Court of Appeal’s judgment at paragraphs 38 and 39 here is a useful guide as to how similar cases will be treated:-

 

“38.        The defendant’s case that the CFA was frustrated depends on the proposition that the obligation to give instructions was personal to the claimant and could not be discharged by the giving of instructions by a receiver/deputy acting on her behalf. Whilst a solicitor’s retainer is in one sense a personal contract, I very much doubt whether it requires instructions to be given by the client personally even in the general run of cases. It must be commonplace for instructions to be given through an agent, such as an accountant or managing agent or a spouse. But whatever the general position, the parties must have contemplated in the particular circumstances of this case that the claimant might suffer from a further period of incapacity in which she would be unable to give instructions personally but they could be given by a litigation friend or a receiver/deputy or on her behalf… The fact that supervening incapacity prevented the claimant from giving instructions personally did not render the contract of retainer impossible of performance; it simply gave rise to a short period of delay pending appointment of a receiver/deputy who could continue the conduct of the proceedings on the claimant’s behalf and give instructions to the solicitors for that purpose.

 

  1. … if the claimant was under an obligation to give instructions personally and was unable to comply with that obligation by reason of her supervening incapacity, the situation was covered by the express terms of the CFA, which entitled the solicitors in that event to end the contract and to require payment of their basic charges and disbursements. The unattractiveness of such a result is a further indication that it cannot have been the intention of the parties that the claimant had to give instructions personally; but if that was their intention, and the situation arose in which the claimant was unable to give such instructions, the contract catered expressly for the consequences and it cannot possibly be said that this was a fundamentally different situation from anything contemplated by the contract.”

 

The decision in Findley v Barrington Jones [2009] EWHC 90130 (Costs) is overturned.

 

This decision was made in the specific context of a pre-1 April 2013 Conditional Fee Agreement with a recoverable success fee and indeed the reason for the challenge was to avoid costs which would undoubtedly have been payable but for the claimant’s incapacity caused by the defendant’s negligence. Thus it is about as unattractive an argument that could ever be run. Indeed the first instance judge, whose decision the High Court overturned, described it as “desperately unfair.”

 

As Mr. Justice Phillips points out:

 

“The question is currently of particular importance for solicitors conducting personal injury claims pursuant to conditional fee agreements entered into before 1 April 2013, in respect of which success fees continue to be recoverable from defendants.” (See s. 44(6) of the Legal Aid, Sentencing and Punishment of Offenders Act 2012).

 

“If such an agreement is found to have terminated by reason of the supervening incapacity of the claimant (such incapacity being by no means a rare occurrence in serious personal injury cases), it would not now be possible to replicate the effect of the original contractual arrangements between solicitor and client given that success fees are not generally recoverable in respect of agreement made on or after 1 April 2013 (see s.58(A)(6) of the Courts and Legal Services Act 1990). No matter how short the period of incapacity (theoretically, even a scintilla of time), nor how quickly a deputy was appointed by the Court of Protection in respect of the claimant, the original CFA would be lost and could not, in real terms, be replaced.”

 

Contract for necessaries

 

There is a strong argument that a conditional fee agreement to pursue a lawsuit is a contract for necessaries; such contracts have always been treated differently.

 

Section 7 of the Mental Capacity Act 2005 provides that if necessary goods or services are supplied to a person who lacks capacity to contract for them that person must nevertheless pay a reasonable price for them.

 

“Necessary” means suitable to a person’s condition in life and actual requirements at the time when the goods or services are supplied.  The Mental Capacity Act 2005 provides an explanation of lack of capacity which is very much the same as that previously applied by the courts.

 

Ratification

 

A person who lacks mental capacity at the time of entering into a contract, thus rendering it potentially voidable, may nevertheless be bound by it if he ratifies it after recovery, or during an interval where he has the capacity to ratify the contract.

 

Ratification can be express or implied by conduct, including by acquiescence or inactivity, and there is an overlap with the doctrine of estoppel.  Clearly a client who continues to give a solicitor instructions is impliedly, if not expressly, ratifying the contract, which in personal injury work will almost invariably be a conditional fee agreement.

 

Ratification is different from novation.
Thus the action of acting for a patient under a conditional fee agreement should not of itself cause any difficulties over and above those involved anyway in such cases.

 

I am grateful to Andrew Hogan, Costs Barrister, for much of the material relating to capacity

 

Death

 

The same point arises. If a person dies, then does the CFA entered in to by the Personal Representatives post 31 March 2013 carry a recoverable success fee? On the face of it, it does not, and the position is analogous to that of a minor achieving majority after 31 March 2013.

 

Death of a Litigation Friend

 

Supposing that a client lacks capacity throughout the claim and the litigation friend dies. Can a pre April 2013 Conditional Fee Agreement with a dead Litigation Friend be taken over by a new Litigation Friend or is a new post Legal Aid, Sentencing and Punishment of Offenders Act 2012 Conditional Fee Agreement necessary, with the risk of loss of recovery?

 

My view is that a fresh Conditional Fee Agreement is not necessary. The true party has been the same throughout and the solicitors have been the same throughout and it is clearly a pre-April 2013 Conditional Fee Agreement. The Litigation Friend is just that and is not a party to the litigation. All that needs to happen is that the new Litigation Friend be formally advised of their responsibilities, with the Solicitor’s Certificate for suitability etc. being dealt with. The Litigation Friend is just that – the friend in the litigation and that does not affect the underlining contractual relationship.

 

As a belt and braces policy I advise the adoption of the suggestion I have made above, but also to enter into a fresh Conditional Fee Agreement with the litigation friend but stated to be on the basis that it only comes into play if the original Conditional Fee Agreement is found, for any reason, to be no longer valid. The authority for more than one Conditional Fee Agreement being in place at any given time is Forde v Birmingham City Council [2009] EWHC 12 (QB).

 

In my view a court will work very hard to preserve the validity of the original Conditional Fee Agreement, and therefore recoverability of the success fee and indeed pre-death of Litigation Friend base costs as failure to do so would clearly discriminate against disabled people and is arguably unlawful and a breach of the Human Rights Act 1998.

 

In any event a contract between a patient lacking capacity and a solicitor is not void but is voidable and so even if the contract was between the claimant and the patient that would not be fatal to the agreement.

 

That was the rule laid down in Imperial Loan Company Ltd v Stone [1892] 1 QB 599.

 

The paying party has no standing to interfere with that legal position and has no power to argue that the claimant/patient should be required to void the contract.

 

It would be curious indeed if a contract between someone lacking capacity and made pre-April 2013 would be upheld but one where a Litigation Friend had been properly appointed, but then had died, would not be upheld.

 

In the very recent decision in Blankley v Central Manchester and Manchester Children’s University Hospital NHS Trust [2015] EWCA Civ 18 the Court of Appeal confirmed that the liability to pay a solicitor’s costs remains with the litigant, even a litigant without capacity, and not with the litigation friend. Thus if the client lacks capacity at the time of retainer, then that retainer is still with the litigant and the litigation friend is merely a statutory agent of the incapacitated litigant, and not a principal to the retainer.

 

This is essentially the same line of reasoning as the court adopted in Dunn v Mici [2008] EWHC 90115 (Costs) in relation to minors.

 

Solution

 

The date of the cause of action, not the date of the CFA, should have determined recoverability.

 

Thus if the cause of action arose before 1 April 2013, then the success fee would be recoverable irrespective of when the CFA was signed.

 

The system is a lottery. The client who rushed off to a lawyer by the end of March can recover the success fee; the client who sought to resolve matters first without seeing a lawyer loses out if they sign up after 31 March 2013.

 

Why?

 

The 25% damages cap in personal injury proceedings

 

I have no problem with this, but limiting the pool of damages to general damages and specials to date, thus excluding future loss, will cause endless problems.

 

  1. Global offers

Most defendants’ offers, Part 36 or otherwise, are global, that is they cover all aspects of the claim except costs.

 

That makes perfect sense, but how is a claimant and solicitor to determine what element relates to future special damages which are thus excluded from the pool on which the 25% bites?

 

  1. Future delayed become specials to date

Solicitor’s firm Quick and Good settle early and their 25% is based on general damages of say £50,000 and one year’s specials to date of £50,000, total £100,000 – fee £25,000.

 

General damages £50,000
1 year’s specials at £50k £50,000
 

£100,000

 

Solicitor’s success fee capped at

 

£25,000

 

Firm Slow and Poor take 5 years to settle the claim and only get £40,000 generals and £40,000 a year specials

 

General damages £40,000
5 year’s specials at £40k £200,000
 

£240,000

 

Solicitor’s success fee capped at

 

£60,000

 

Quite simply every month delayed in any case with heavy special damages is a significant extra fee for the solicitor.

 

Appeals

 

For reasons beyond me, a solicitor acting other than at first instance can take all of the damages by way of a success fee (Article 5(1)(b)), that is literally 100%, but no more!

 

Now if as a claimant you lost at first instance then in a sense nothing is lost, except all of your damages if you win on appeal.

 

However a claimant winning at first instance and then responding to an appeal risks losing all of their damages, even if wholly successful in the appeal.

 

My firm has always taken the view that resisting an appeal and seeking to hold on to the client’s damages is part of the job.

 

If the appeal is successfully resisted then ordinary costs, at a decent rate, are recovered from the other side; if the appeal is lost then there are no damages to even get the 25% from anyway.

 

Take the client who wins and is awarded £100,000 and pays a success fee of £25,000.  The client successfully appeals quantum and is awarded £120,000; the solicitor, being ever so reasonable, takes just 50%, not 100% of damages, leaving the successful appellant with £60,000, that is £15,000 less than if he or she had not appealed and won.

 

Initial award £100,000
Success fee – 25% £25,000
 

Client receives

 

£75,000

 

Award after appeal

 

£120,000
Success fee – 50% £60,000

 

 

Client receives

 

 

£60,000

 

Having a different cap at appeal level makes no sense at all and is deeply harmful to clients.

 

Solution

 

To avoid the establishment of the Department of Cases That We Never Finish Until the Client Dies – echoes of Jarndyce v Jarndyce in Bleak House – and to avoid the Global Offer issue the following should be adopted:

 

25% cap on damages up to £100,000

 

10% cap on damages between £100,000 and £500,000

 

5% cap on damages above £500,000

 

You can play around with the figures but the principle is sound.

 

Note that there is nothing stopping a Claims Management Company charging the client 25% of damages under The Damages-Based Agreements Regulations 2013 and the solicitor then taking the case on and charging a 25% of damages success fee under The Conditional Fee Agreements Order 2013, resulting in the client losing 50% of any damages as well as any After-the-Event insurance premium.

 

As a consumer/client protection measure this ranks alongside Claims Direct and The Accident Group.

 

Counsel

 

Having an overall cap of 25% also creates potential problems.  Now that counsel have got used to success fees they may not be keen to accept instructions on a CFA basis where liability is seriously in issue but they will get a success fee based on say 12.5% of damages if they split the 25% with the instructing solicitor.

 

Solicitors may be reluctant to instruct counsel on a CFA, where the matter is proceeding to trial on quantum only, if they have to surrender half of their success fee, having shouldered nearly all of the risk.

 

Solicitors are effectively paying counsel’s success fee out of their own pocket.

 

True it is that all of these problems existed pre-recoverability but then counsel working under a CFA was much less common and the 25% cap was voluntary, although generally observed.

 

The answer is to cap the whole sum which may be taken from the client, however comprised, maybe at 35% as is the case in employment tribunal cases, although there, there is no recovery of any costs from the losing party.

 

Section 44(4) abolishes recoverability of the success fee in all cases. 100% will remain the maximum costs-based success fee in all cases.  The cap on the success fee of a sum equal to 25% of damages only applies in personal injury cases.

 

Transitional arrangements

 

Clearly an agreement dated post 1 April 2013 but retrospective will not avoid the provisions of the Act and the courts have found against rectification – see Oyston v Royal Bank of Scotland Plc [2006] EWHC 90053 (Costs).

 

However it is arguable that an agreement actually entered in to on or after 1 April 2013 but backdated is not caught by the Act as although the courts clearly prefer retrospective CFAs they have not gone as far as actually to prohibit backdated CFAs.

 

In Forde v Birmingham City Council [2009] EWHC 12 (QB)

 

the High Court held the second of two conditional fee agreements to be valid and enforceable, even though it was retrospective and the retrospective period covered a period prior to 1 November 2005, when there was a very different, much stricter, regime in place.

 

Consequently CFAs which were defective under the pre-1 November 2005 regime could be “cured” by entering in to a new, but retrospective, CFA.

 

The same logic could be applied in relation to CFAs entered in to post 1 April 2013, but backdated to bring them within the pre-LASPO 2012 regime.

 

However in such circumstances a court would almost certainly exercise its discretion to disallow recoverability, both because the notice to the paying party will have retrospective effect, although not backdated, and also so as to give effect to the clear will of Parliament; as we have seen even where a backdated CFA is valid the courts have been very reluctant to allow recoverability from the period prior to the actual date of signing.

 

In O’Brien v Shorrock and Motor Insurers’ Bureau [2015] EWHC 1630 (QB)

 

the Queen’s Bench Division of the High Court considered various matters in relation to Conditional Fee Agreement formalities, especially backdating.

 

Here the claimant’s litigation friend entered into a CFA on 21 October 2009 which provided for a 100% success fee and that date appeared on the page where the parties signed it, but on the first page it said:-

 

“Agreement Date 6th November 2008 (NB: As agreed, this Agreement takes effect from when you first instructed Potter Rees)”

 

The claimant’s claim arose from an accident and he had previously instructed other solicitors and on 2 November 2005 the MIB told them that it would make a “full award to your client under the terms of the Untraced Drivers Agreement.” In late 2008 Potter Rees took the claim over and by letter of 12 January 2009 said that they reserved their “position as to whether a claim exists under the terms of the Uninsured Drivers Scheme.”

 

The claim was eventually brought under the Uninsured Drivers Scheme and proceedings were issued on 1 April 2010 and judgment was subsequently entered against the first defendant to be satisfied by the MIB.

 

Here the Conditional Fee Agreement covered a civil action against the Motor Insurers Bureau. Could it be construed as covering an action under the MIB Untraced Drivers Agreement?

 

The Notice of Funding was defective in that it did not state the date on which the CFA was signed; the CFA had been signed on 21 October 2009 and expressed to be retrospective to 6 November 2008. The Notice of Funding gave the date of the CFA as 6 November 2008. The defendant successfully argued that it should have been given notice that the CFA was retrospective.

 

The High Court granted relief from sanctions but reduced the success fee from 40% to 20% for the period between 6 November 2008 and 21 October 2009 as against the success fee of 67% which it allowed generally.
The defendant was awarded 70% of its costs of appeal.

 

The court held that the CFA was entered into to cover the damages action against Mr Shorrock and the MIB and not a claim for a payment from the MIB under the Untraced Drivers Agreement. Thus there was a risk justifying a success fee. Consequently the court rejected the paying party’s submission that the solicitors were never at risk of losing as if the civil action failed at the preliminary issue stage then they would succeed under the Untraced Drivers Agreement.

 

The court pointed out that the Untraced Drivers Agreement Scheme was very different and very limited costs were recoverable.
The following passages are of general interest:-

 

“There would have been other ways of funding such a claim, such as a contingency fee which would require him to pay a share of the sum of money recovered from the MIB under the Untraced Drivers Agreement or even an old fashioned agreement whereby he agreed to pay the costs in any event knowing that he would be receiving substantial damages from which he could do so.”

 

The court also appeared to express displeasure at the fact that only limited costs could be recovered under the Untraced Drivers Agreement:-

 

“Whether it is, or is not fit for purpose is beside the point which I have to address.” (Paragraph 18).

 

“The only way in which the claimant could recover the very large costs necessary to prove his claim as to quantum was to succeed in his court proceedings. Otherwise, the money would be usefully spent but not recoverable from the MIB because of the cost regime in Untraced Drivers claims. It seems to me that it was entirely reasonable to choose a means of proceeding which left his damages free for the purposes for which they were intended, rather than being used in part to fund the cost of obtaining them.”

 

The judge accepted that the main risk to recovery “would arise only if a Part 36 offer were made and not beaten. I accept that this is a factor which is relevant to the assessment of the success fee, but not that it is capable of reducing it to 5%.” [As argued by the paying party]. (Paragraph 21).

 

In fact the court allowed 67%. The matter went to trial. It was too old a case to be covered by the fixed success fee scheme, whereby all matters going to trial attracted a 100% success fee. The court said that that 100% was the quid pro quo for the low figure of 12.5% on settled matters. It was an error of law to assume that 100% was the correct success fee in all matters that went to trial; that only applied to fixed success fee cases – see Atack v Lee [2005] 1 WLR 2643.

 

The appeal judge agreed with the trial judge that the Notice of Funding did not comply with the Practice Direction as it failed to contain the date of the document, that is 21 October 2009.

 

The appeal judge accepted that making retrospective CFAs was not improper. Here the judge refers frequently to this CFA being backdated but that is wrong. It was a CFA with retrospective effect.

 

However the judge correctly analysed the scope for abuse. The CFA could be entered into once liability had been admitted and thus the risk greatly reduced but could be made retrospective to a pre-admission date thus apparently justifying a high success fee even though the solicitors had not entered into a CFA during the high risk period. In other words they could eat their cake and still have it.

 

“Less starkly, a solicitor may choose to investigate a case without committing to conducting it to a conclusion and later decide that the prospects justify that commitment. Backdating the agreement involves claiming a success fee on the basis of exposure to risk which was not, in fact, present. That is what happened here.” (Paragraph 44).

 

“Retrospective CFAs should attract a degree of scepticism…” (Paragraph 55).

 

 

COLLECTIVE CONDITIONAL FEE AGREEMENTS

 

In relation to Collective Conditional Fee Agreements it is not possible to claim a success fee in a post April 2013 matter even if the Collective Conditional Fee Agreement was signed prior to 1 April 2013.

 

In such circumstances the relevant date is when the work began – if it began prior to 1 April 2013 then the success fee is recoverable; if not then it is not.

 

DIFFUSE MESOTHELIOMA CLAIMS

 

Mesothelioma claims are excluded from the provisions abolishing the recoverability of success fees and after-the-event insurance premiums and thus recoverability remains in relation to such claims, even where the conditional fee agreement was entered in to after 31 March 2013 and the after-the-event insurance was taken out after that date.

 

The exclusion is achieved by a tortuous route.

 

Article 1(2) of The Conditional Fee Agreements Order 2013, SI 2013 No 689, states 1:

 

In this Order –

 

…..”diffuse mesothelioma” has the same meaning as in section 48(2) of the Legal Aid, Sentencing and Punishment of Offenders Act 2012;”

 

Article 6(2)(a) which is headed “Transitional and saving provisions” disapplies Articles 4 and 5 in relation to “proceedings relating to a claim for damages in respect of diffuse mesothelioma;”

 

Articles 4 and 5 deal with changes in relation to the amount of the success fee in certain cases.

 

Section 48 of the Legal Aid, Sentencing and Punishment of Offenders Act 20122 reads as follows:

 

“48         Sections 44 and 46 and diffuse mesothelioma proceedings

 

  • Sections 44 and 46 may not be brought into force in relation to proceedings relating to a claim for damages in respect of diffuse mesothelioma until the Lord Chancellor has –

 

  • carried out a review of the likely effect of those sections in relation to such proceedings, and

 

  • published a report of the conclusions of the review.

 

 

Sections 44 and 46 abolish the recoverability of the success fee and after-the-event insurance premium respectively and therefore section 48(1) excludes those provisions in relation to diffuse mesothelioma claims, and as we have seen Article 6(2)(a) of The Conditional Fee Agreements Order 2013 preserves for such claims the old success fee regime.

 

The net effect is that in diffuse mesothelioma claims the success fee and after-the-event insurance premium remain recoverable from the other side and the fixed success fee is 100% if the matter proceeds to a hearing and 27.5% otherwise. [Source: Old CPR 45.24(2)(ii)].

 

Section 48(2) states that “diffuse mesothelioma” has the same meaning as in the Pneumoconiosis etc (Workers’ Compensation) Act 19793, to which I now turn.

 

That Act is entirely silent on what is “diffuse mesothelioma” and so for section 48(2) of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 to refer to “diffuse mesothelioma” as having the same meaning as in the 1979 Act is meaningless, save that any case law under the 1979 Act as to the disease’s definition will be binding under the 2012 Act.

 

The heading of the 1979 Act, not itself part of the Act, states:

 

“An Act to make provision for lump sum payments to or in respect of certain persons who are, or were immediately before they died, disabled by pneumoconiosis, byssinosis or diffuse mesothelioma; and for connected purposes”.

 

The list is repeated in section 1(3), but nowhere is any definition given.

 

Although not referred to, The Mesothelioma Lump Sum Payments (Claims and Reconsiderations) Regulations 20084 state at Reg 1(2):

 

““mesothelioma” means diffuse mesothelioma”.

 

Black’s Medical Dictionary 42nd Edition gives a definition of mesothelioma as follows:

 

“A malignant tumour of the Pleura, the membrane lining the chest cavity.  The condition is more common in people exposed to asbestos dust.  It may be asymptomatic or cause pain, cough, and breathing troubles.  Surgery or radiotherapy may be effective but often the disease has spread too far before it is discovered.  Mesothelioma incurred as a result of contact with asbestos at work may attract industrial compensation”.

 

The recoverability of a success fee in mesothelioma claims is yet to be abolished and section 48 of Legal Aid Sentencing and Punishment of Offenders Act 2012 requires that the Lord Chancellor carries out a review on the likely effect of sections 44 and 46 in relation to mesothelioma claims and publishes a report on the conclusions of this review before sections 44 and 46 can be brought into force in relation to mesothelioma claims. This report was published on 6 March 2014.

 

The Government has concluded that it is right to commence sections 44 and 46 of the Legal Aid Sentencing and Punishment of Offenders Act 2012 for mesothelioma cases and proposes to synchronise the commencement of those sections with the making of the compensation payments under The Diffuse Mesothelioma Payment Scheme Regulations 2014 and The Diffuse Mesothelioma Payment Scheme (Amendment) Regulations 2014 (see paragraph 119 of the Government’s response). This has not happened and no Commencement Order has been passed in order to abolish the recovery of success fees in mesothelioma claims.

 

The commencement of sections 44 and 46 will be implemented by way of a Commencement Order under section 151 Legal Aid Sentencing and Punishment of Offenders Act 2012.

 

In R (Whitston, Asbestos Victims Support Groups Forum UK) v The Secretary of State for Justice and Association of British Insurers [2014] EWHC 3044 (Admin) 2 October 2014 the Administrative Court of the Queen’s Bench Division held that the Lord Chancellor failed to conduct a proper review of the likely effect of the Legal Aid, Sentencing and Punishment of Offenders Act Reforms on Mesothelioma claims and consequently cannot remove the recoverability of After-the-Event insurance premiums and success fees in such cases without carrying out a proper review.

 

Section 48(1) of LASPO provides:-

 

Sections 44 and 46 may not be brought into force in relation to proceedings relating to a claim for damages in respect of diffuse mesothelioma until the Lord Chancellor has—

 

  • carried out a review of the likely effect of those sections in relation to such proceedings, and

 

  • published a report of the conclusions of the review.”

 

In December 2013 the Lord Chancellor decided to bring into force sections 44 and 46 of LASPO in relation to Mesothelioma claims and the decision was announced in a written administrative statement and it was that decision that was being judicially reviewed here.
The effect of bringing those sections into force is that recoverability of the success fee and the After-the-Event insurance premiums would end in Mesothelioma claims.

 

The Administrative Court upheld the Claimant’s submission that the Lord Chancellor had not carried out a review sufficient to comply with the requirements of section 48(1).

 

The court pointed out that the review conducted by Lord Justice Jackson, resulting in the Jackson Report, did not specifically address the issue of mesothelioma claims, in fact the court considered it relevant when considering what was required by way of a review by the Lord Chancellor under section 48 of LASPO.

 

In paragraph 10 the court quoted from paragraph 64 of the Ministry of Justice’s November 2010 Consultation Paper – Proposals for Reform of Civil Litigation Funding and Costs in England and Wales Report:-

 

“Sir Rupert is convinced that if recoverability were abolished then success fees and ATE insurance premiums would become subject to market forces. Claimants would shop around for lower success fees and ATE insurance premiums.”

 

The court then says that the paper, read as a whole, plainly indicated that the government at that point accepted the merits of that argument.
The court then recited the history of the legislation resulting in mesothelioma claims being excluded from the ban on recoverability of success fees and ATE premiums until a review had been carried out as set out in section 48(1).

 

The court went on to hold that the consultation document issued by the government – Reforming mesothelioma claims: The Government response to consultation on proposals to speed up the settlement of mesothelioma claims in England and Wales – could not provide the Lord Chancellor with the information that he needed to conduct the review as required by section 48. This was partly because the consultation process was dealing with other matters, including the new statutory mesothelioma scheme.

 

The court also pointed out that in the ministerial statement on 4 December 2013 stating that the government did not believe that the case had been made out for treating mesothelioma cases different from other personal injury cases the Lord Chancellor did not give any indication of what he had concluded as to the likely effects of abolition of recoverability in mesothelioma cases and that was the statutory purpose of the review.

 

In paragraph 37 of the Judgment the court concluded:-

 

“37 The issue is whether the Lord Chancellor conducted a proper review of the likely effect of the LASPO reforms on mesothelioma claims. For the reasons given above I conclude that he did not. No reasonable Lord Chancellor faced with the duty imposed on him by Section 48 of the Act would have considered that the exercise in fact carried out fulfilled that duty. I do not find that a consultation exercise per se was an inappropriate means of fulfilling the duty. Rather, the nature of this consultation meant that it did not permit the Lord Chancellor to do so.”

 

In paragraph 39 of the Judgment the court concluded:-

 

“39 I shall hear argument from the parties as to the appropriate relief. In strict terms I am concerned only with whether there was a proper review under Section 48. In view of my conclusion on that issue, my preliminary view is that I simply should make a declaration that the Lord Chancellor has failed to carry out a review as required by Section 48. The statutory consequence of such a declaration must be that that Sections 44 and 46 cannot be brought into force in relation to proceedings relating to a claim for damages in respect of diffuse mesothelioma. The decision of the 4th December 2013 will fall as a result of the operation of Section 48.”

 

The Government announced in late 2014 that it will not appeal against the decision and will not seek to end recoverability.

 


 

CONTINGENCY FEES AND DAMAGES BASED AGREEMENTS

THE PRE APRIL 2013 REGIME

 

Contingency fee agreements have always been allowed in non-contentious work.  Pre-issue work is classed as non-contentious and therefore can be carried out under a contingency fee agreement.

 

However once the case is issued then that pre-issue work retrospectively becomes contentious and thus the contingency fee agreed is of no effect. The solution is to enter into a conditional fee agreement and a contingency fee agreement from Day One. This is still necessary under the post-LASPO regime. Although contingency fees in the form of damages-based agreements are now allowed for litigation, the very considerable formalities of The Damages-Based Agreements Regulations 2013 must be followed. An out and out contingency fee agreement is still not permitted for litigation: see above for analysis of Rees v Gateley Wareing [2014] EWCA Civ 1351.

 

The agreement with the client will be that the contingency fee agreement operates until proceedings are issued at which point it drops away and the conditional fee agreement is deemed to have been in place from the beginning.  This is achieved by a bridging agreement.

 

Absent a contractual agreement with the other side there is no right to costs pre-issue and therefore it does not matter that the conditional fee agreement is not in place.  Costs are only payable by agreement; if they are agreed then there is no problem and if they are not agreed then proceedings will need to be issued at which point the conditional fee agreement comes in to force with effect from the beginning of the case.

 

The potential problem is that fees on an hourly basis, even with a success fee, may be significantly less than the contingency fee would have been.  That will depend upon a combination of the settlement figure and the contingency fee percentage on the one hand and the time spent and the hourly rate on the other hand.

 

Thus where there is a contingency fee agreement you should have a high hourly rate in the conditional fee agreement.

 

Solicitor and own client rates can and should be very much higher than the rates that you are likely to recover on a between the parties basis.

 

This is for two reasons:

 

  • to maximize the alternative “take” to the contingency fee; and

 

  • to maximize the indemnity costs received if, as a claimant, you match or beat your own Part 36

 

THE NEW REGIME: POST 31 MARCH 2013

 

Speaking to Liverpool Law Society on 11 March 2015, Dominic Regan said “The Damages-Based Agreement Regulations are unworkable and dead. It is astonishing that the Ministry of Justice embraced the Jackson reforms but then shunned his plea to allow hybrid agreements. A sensible, alternative funding option was never given a chance.”

 

Lord Justice Jackson, in a speech to the Law Society Conference on Commercial Litigation:  Post Jackson World on 20 October 2014 recognised this, saying “… almost no one ever enters into a DBA.”

“There is a strong fear that, because of the indemnity principle, the other side will advance technical arguments of the kind that gained popularity (some would say notoriety) during the “costs war” over CFA.”

 

“If the common law “indemnity principle” is abrogated, as recommended in FR [Final Report] chapter 5, some of these problems will melt away.”

 

Lord Justice Jackson also recommended that hybrid DBAs – No Win Lower Fee Agreements – be allowed as they are in Conditional Fee Agreements.

 

Interestingly Lord Justice Jackson also had this to say:-

 

3.18 Where does the opposition come from.

 

I suspect that the real opposition to hybrid DBAs comes from those who oppose DBAs in principle.  Many large organisations who are on the receiving end of claims find the notion of DBAs abhorrent.  See for example PR [Provisional Report] page 99, paragraph 2.3.  Understandably, a regime which prevents people bringing meritorious claims suits their interests.  A set of DBA Regulations which no-one uses is admirable from that viewpoint.

 

3.19 Standing firm against powerful vested interests.

 

…Now it is equally important that those in authority stand up to powerful vested interests within the “big business” camp.”

 

I agree.  What Lord Justice Jackson does not address is the issue of having to give credit, pound for pound, in a Damages-Based Agreement for costs received from the other side.  The beneficiary here is one’s own client who has agreed to pay a percentage of damages, but can never in fact pay that sum because of the need to give credit.

 

Clearly there is no such need in a conditional fee case where the success fee is a separate identifiable sum which cannot be recovered from the other side and therefore which the client has to pay in full.

 

This is the so called Ontario model.  Subject to also abolishing that requirement, damages-based agreements will become a very valuable method of funding cases.

 

Damages-based agreements are allowed in all types of civil litigation, including in relation to all post-issue work including advocacy.

 

This is achieved by section 45 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 which amends section 58AA of the Courts and Legal Services Act 1990, which was itself an amendment to formalize and regulate contingency fee agreements in employment tribunals. Article 3(b) of The Legal Aid, Sentencing and Punishment of Offenders Act 2012 (Commencement No 5 and Saving Provision) Order 2013 brought section 45 in to effect from 1 April 2013.

 

Article 2(a) of The Legal Aid, Sentencing and Punishment of Offenders Act 2012 (Commencement No 2 and Specification of Commencement Date) Order 2012 brought into force section 45(1) and (8) of the Act.

 

Section 45(1) makes provision for amendments to section 58AA of the Courts and Legal Services Act 1990 and section 45(8) inserts into section 58AA of that Act a new subsection (6A), and that new subsection provides that rules of court may be made in respect of the assessment of costs in proceedings where a party in whose favour a costs order is made has entered into a damages-based agreement.

 

The Damages-Based Agreements Regulations 2013 came in to effect on 1 April 2013.  They appear at the end of this section.

 

Indemnity Rule applies

 

The final nail in the DBA coffin is confirmation that the indemnity principle applies to DBAs. Thus a solicitor will never be able to recover from the losing party a sum in excess of the amount chargeable to one’s own client under the DBA, which sum itself is capped by Regulation 4 of The Damages-Based Agreement Regulations 2013.

 

In Barry and others v University of Wales Trinity St. David, Cardiff Employment Tribunal 28 April 2014

 

Cardiff Employment Tribunal refused to award costs against the respondent in favour of the claimant who had the benefit of a Damages-Based Agreement.

 

Costs awards are unusual in employment tribunals and damages-based agreements are compulsory if any form of contingency fee or conditional fee is used.

 

Here the employment tribunal refused to award costs due to a combination of the Ontario principle and the indemnity principle, the point being that the DBA did NOT provide that credit for any costs received would be given against the contingency fee, but rather in addition to it.

 

That breached the Ontario principle and would also give the claimant’s solicitor more than the sum chargeable under the DBA. The tribunal recognised that it might be wrong on the indemnity principle point as the DBA provided for a contingency fee AND any costs received from the other side.

 

If that were the case then they would disallow the costs on the basis that costs exist to compensate the receiving party and not to punish the paying party, see for example

 

Lodwick v Southwark London Borough Council [2004] EWCA Civ 306.

 

That must be wrong. Any recoverable success fee is a reward for the solicitor and not the client and the fact that the solicitor would have got extra here is no different.

 

I am satisfied that the employment tribunal erred in law both in relation to the indemnity principle and Lodwick.

 

I am reinforced in that view by the decision of the Court of Appeal in Brawley v Marczynski & Anor No.2 [2002] EWCA Civ 1453.

 

There the Court of Appeal awarded indemnity costs to a legally-aided party to penalize the losing party for its unreasonable conduct in the case, saying that it is no bar to an indemnity costs order that the only beneficiary is the claimant’s lawyer, as the claimant would not have to pay anything in any event, whatever the result, that is a loss or a win with costs on the standard basis, or a win with costs on the indemnity basis.

 

The Ontario point is more difficult. It could be argued that the bill to the client is contingency plus recovered costs, as in a conditional fee case and therefore the recovered costs are simply set-off against that aspect of the bill.

 

The alternative argument is that the contingency fee is the maximum prescribed by Parliament and therefore any recovered costs must be applied against that sum under the Ontario principle.

 

Ironically the solicitor here was charging only 25% whereas the maximum in employment tribunals is 35%.

 

Application of Indemnity principle

 

Thus in a personal injury case the DBA is capped at 25% of damages, that sum includes VAT and counsel’s fees. Maximum recovery, after a trial, is limited to that sum, which net of VAT is 20.83% profit costs, less counsel’s fees.

 

Let us take an Employer’s Liability case where £15,005 is awarded at court.

 

Act on an hourly rate basis, getting paid win or lose, and the proposed fixed recoverable costs (FRC) are £12,517.80 including advocacy fees and VAT.

 

In addition you are free to charge the client extra non-recoverable solicitor and own client costs and you are free to charge the client full solicitor and own client costs in the event of defeat.

 

Have a conditional fee agreement with the client and in the event of a win you can have all of the above and a success fee.

 

Thus a DBA provides by far the greatest protection to the client. The application of the indemnity principle benefits only the tortfeasor, as credit must already be given to the claimant, pound for pound, for costs recovered.

 

This is a lawbreaker’s Charter.

 

Here is how it works on a DBA:

 

 

Maximum fee (25% of £15,005) £3,751.25
Less
Counsel fixed advocacy fee including VAT                 £1,980.00
£1,771.25
Say counsel’s fee for conference, advice, etc.

£1,500.00 + VAT

 

£1,800.00

Fee to solicitor for taking risk and winning MINUS  £     28.75

 

So you take all of the risk – and win.

 

Recovery is limited to £3,751.80, all of which – and more – is spent on counsel’s fees.

 

The defendant gets a windfall of £8,766.55 (FRC of £12,517.80 minus MAXIMUM DBA of £3,751.80).

 

Alternatively act by the hour and charge what you want.

 

Thus due to the indemnity principle, the solicitor acting for a successful claimant will only receive the contingency fee, even if recoverable costs would be higher. This point has been picked up by Master Haworth of the Senior Courts Costs Office. Speaking at the Lexis Nexis Costs and Litigation Funding Forum on 31 October 2012 he questioned what would happen in such a case, pointing out that the Legal Aid, Sentencing and Punishment of Offenders Act 2012 does not abrogate the indemnity principle and concluded that this meant that the solicitor would not be able to recover more than he would recover as a contingency fee.

 

Master Haworth gave as an example of a £12,000.00 personal injury case with recoverable costs of £6,000.00.

 

A solicitor operating under a Damages-Based Agreement would only be able to recover £3,000.00, providing the defendant’s insurer with a windfall of £3,000.00 and achieving no benefit for the claimant.

 

A solicitor in the same case with a conditional fee agreement and no success fee, thus totally protecting the claimant from any fees or deduction from damages would receive £6,000.00.

 

A solicitor with a conditional fee agreement with a success fee would receive up to £9,000.00, being recoverable fees plus a success fee capped at £3,000.00, being 25% of damages.

 

As Master Haworth so accurately put it:

 

“It makes DBAs meaningless in low-value claims,”

 

Bizarrely the Legal Services Board has written to the Office for Legal Complaints, which oversees the Legal Ombudsman, with a formal notice under Section 120 of the Legal Services Act 2007, requiring an interim report by 1 June 2014 and a final report by 1 June 2015, in relation to complaints received by the Ombudsman scheme concerning transparency of the cost of legal services and in particular transparency of damages-based agreements. (Letter of 18 June 2013 – see here).

 

For formal Section 120 Reporting Requirement – see here at page 3.

 

I cannot trace a similar formal requirement concerning complaints about hourly rates.

 

The Legal Services Board, the most pointless of all quangos, needs to get over it as I believe the modern phrase is. Contingency Fees are here to stay.

 

The Cap

 

In personal injury claims there will be a 25% cap on the amount of damages, excluding damages for future care and loss, that can be taken as a lawyer’s contingency fee. The cap will apply to net damages after Department of Work and Pensions benefit recovery; this Department seeks to recover benefits paid out where a claimant subsequently recovers damages for loss of income.

 

The 25% includes VAT and counsel’s fees.

 

In relation to proceedings other than those at first instance there is no limit on the percentage of the client’s damages that can be taken.  Compare this with the conditional fee success fee where the maximum is 100% in non-first instance matters.

 

In employment tribunal cases the cap remains at 35% as prescribed by the Damages-Based Agreements Regulations 2010, which have been repealed by The Damages-Based Agreements Regulations 2013, but all key provisions are replicated in the new Regulations. In Employment Tribunal proceedings alone, counsel’s fees may be charged in addition to the capped percentage of solicitors’ fees.

 

In all other cases, including employment cases in the High Court/County Court, there is a 50% cap on the amount of damages.

 

PART 36

Defendants’ Offers

 

One problem is the interplay between the cap and Part 36.  Thus a claimant is awarded £100,000 at court, but has failed to beat a defendant’s Part 36 offer and is ordered to pay £20,000 costs, meaning that the amount that actually passes from defendant to claimant is £80,000.

 

Is the 25% of £100,000 or £80,000?

 

Of course the solicitor is only entitled to the shortfall between costs recovered and 25%, but this is precisely when that shortfall is likely to occur, as the solicitor will not have recovered post Part 36 costs.

 

Supposing a defendant makes a Part 36 offer which is much less than the amount claimed and the claimant accepts it.  How do the claimant and the solicitor then ascertain the amount to be attributed to future care and loss, and thus to be excluded from the fund on which the 25% cap bites?

 

Claimants’ Offers

 

Claimants’ Part 36 offers will normally have no relevance in DBA cases. To achieve indemnity costs a claimant has to match or beat its own offer at trial. If a matter has reached trial the costs capped by damages will long since have been exhausted and the indemnity principle means that the claimant can never recover more.

 

Global offers

 

Most defendants’ offers, Part 36 or otherwise, are global, that is they cover all aspects of the claim except costs.

 

That makes perfect sense, but how is a claimant and solicitor to determine what element relates to future special damages which are thus excluded from the pool on which the 25% bites?

 

Future delayed become specials to date

 

Solicitor’s firm Quick and Good settle early and their 25% is based on general damages of say £50,000 and one year’s specials to date of £50,000, total £100,000 – fee £25,000.

 

General damages £50,000
1 year’s specials at £50k £50,000
 

£100,000

 

Solicitor’s success fee

 

£25,000

 

Firm Slow and Poor take 5 years to settle the claim and only get £40,000 generals and £40,000 a year specials

 

General damages £40,000
5 year’s specials at £40k £200,000
 

£240,000

 

Solicitor’s success fee £60,000

 

Quite simply every month delayed in any case with heavy special damages is a significant extra fee for the solicitor.

 

Appeals

 

For reasons beyond me, a solicitor acting other than at first instance can take all of the damages by way of a contingency fee in a Damages-Based Agreement. (Regulation 4(4) of The Damages-Based Agreements Regulations 2013.)

 

Now if as a claimant you lost at first instance then in a sense nothing is lost, except all of your damages if you win on appeal.

 

However a claimant winning at first instance and then responding to an appeal risks losing all of their damages, even if wholly successful in the appeal.

 

My firm has always taken the view that resisting an appeal and seeking to hold on to the client’s damages is part of the job.

 

If the appeal is successfully resisted then ordinary costs, at a decent rate, are recovered from the other side; if the appeal is lost then there are no damages to get even the 25% from anyway.

 

Take the client who wins and is awarded £100,000 and pays a success fee of £25,000.  The client successfully appeals quantum and is awarded £120,000; the solicitor, being ever so reasonable, takes just 50%, not 100% of damages, leaving the successful appellant with £60,000, that is £15,000 less than if he or she had not appealed and won.

 

Having a different cap at appeal level makes absolutely no sense at all and is deeply harmful to clients.

 

Solution

 

Clearly there should be the same cap whether at first instance or on appeal.

 

To avoid the establishment of the Department of Cases That We Never Finish Until the Client Dies – echoes of Jarndyce v Jarndyce in Bleak House – and to avoid the Global Offer issue the following should be adopted:

 

25% cap on damages up to £100,000

 

10% cap on damages between £100,000 and £500,000

 

5% cap on damages above £500,000

 

You can play around with the figures but the principle is sound.

 

For the client a contingency fee agreement is likely to be more attractive than a conditional fee agreement.

 

In personal injury cases damages-based agreements are almost entirely pointless from a solicitor’s point of view as they are subject to all of the restrictions that apply in relation to conditional fee agreements AND the solicitor has to allow a pound for pound reduction in relation to any costs received from the losing party, something that does NOT apply in relation to the conditional fee success fee, AND the Indemnity Principle applies, giving the tortfeasor a huge windfall.

 

ADVERSE COSTS

 

There is a further potential problem from a solicitor’s point of view and that relates to potential liability for adverse costs.

 

In Hodgson v Imperial Tobacco [1998] EWCA Civ 224 (12 February 1998) the Court of Appeal held that no adverse costs order could be made against a solicitor simply because of the solicitors having entered in to a lawful conditional fee agreement.

 

One would think that the same principle must apply to solicitors acting under a DBA.  However in his Terms of Reference to the Working Party Lord Justice Jackson said:

 

“If the lawyer stands to receive a share of the proceeds of the litigation, then the question arises whether – if the client fails to pay – the lawyer should be liable for adverse costs on Arkin principles.  It so, there is the further question of whether CPR 48.2 requires amendment or is sufficient as it stands.  If there is no such liability, then litigation funders may be able to bypass their existing liability for adverse costs by buying up law firms and funding litigation through the mechanism of DBAs.”

 

Lord Justice Jackson is right. Putting Arkin very simply, a funder is potentially liable for the costs of the opposing party only to the extent of the funding provided.  So a Third Party Funder who is prepared to put in £100,000, with the prospect of gaining a much greater reward, is liable to the tune of no more than £100,000 of the other side’s costs if the case is lost.  Those of you who remember legal aid contributions will recall a similar system – a client whose contribution to own costs was £500 was also at risk of paying £500 of the other side’s costs.

 

The advent of Alternative Business Structures allows Third Party Funders to either buy up law firms as posited by Lord Justice Jackson, or indeed set up their own firm and that would indeed avoid the Arkin risk.  Actually that could be achieved by dealing with everything as a carefully constructed conditional fee agreement where, due to Hodgson, there is no Arkin risk.

 

Thus the need to deal with Arkin avoidance by Third Party Funders becoming ABSs potentially creates a huge adverse costs risk for lawyers acting under DBAs, a risk that does not exist if acting under a conditional fee agreement, be it a no win – no fee or a no win – lower fee agreement and with or without a success fee.

 

Neither does the risk exist if acting on the hourly rate win or lose method.

 

This is another, powerful, reason why solicitors should not touch damages-based agreements.

 

Lord Neuberger, President of the Supreme Court, said in the 14th Lecture in the Implementation Programme:

 

“Some have already argued that there is little incentive for solicitors to act on DBAs in circumstances where they could act on a CFA. Kerry Underwood has expressed that opinion in this way,

 

In personal injury cases contingency fees are almost entirely pointless from a solicitor’s point of view as they are subject to all of the restrictions that apply in relation to conditional fee agreements AND the solicitor has to allow a pound for pound reduction in relation to any costs received from the losing party, something that does NOT apply in relation to the conditional fee success fee[1].

 

It is an interesting opinion. But it might seem to neglect the client’s point of view in a new legal market place. It may be that it would be unattractive from a solicitor’s perspective to offer a DBA, rather than a CFA, in a personal injury case. But what one solicitor finds pointless may represent another solicitor’s competitive advantage. Given the choice between a solicitor who only offers CFAs and one who offers CFAs and DBAs at more advantageous prices, and perhaps with normal costs calculated by way of fixed fee rather than hourly billing, clients can reasonably be expected to appreciate where their interests lie. In other words, the brave new world of DBAs may well help to encourage a more genuinely competitive market place, in which solicitors are having to become even more client – or consumer – focused.”

 

Master Haworth of the Senior Courts Costs Office, speaking at the Lexis Nexis Costs and Litigation Funding Forum on 31 October 2012 predicted that damages-based agreements would not be used in low-value cases.

 

Furthermore the technical requirements in relation to this statutory form of contingency fee agreement are greater than for conditional fee agreements, which defeats the purpose of pure contingency fee agreements whose beauty is their simplicity and certainty. This point was picked up by Lord Neuberger, Master of the Rolls:

 

“More generally, care will also need to be taken to ensure that the rules governing DBAs are as simple and straightforward as possible. Again, we cannot afford creating a situation where satellite litigation concerning the nature and enforceability of DBAs becomes as common, and detrimental, a feature of litigation as was satellite litigation over 1999 CFAs in relation to litigation after the Access to Justice Act. DBAs cannot be allowed to become yet another blot on the landscape of civil justice. Regulations and rules governing their operation should as far as possible be drafted so that such a possibility cannot arise in practice. We must therefore learn from the problems which arose from 1999 CFAs and keep it simple. Just as important as keeping the rules and regulations simple is ensuring that DBAs themselves are kept simple. One of the things the CJC’s working party will be looking at is the elements which a DBA ought to contain. It is not for the working party to prepare a standard form DBA; that may well be a matter for the professional and regulatory bodies.”

 

The significance of this measure is that it is a statutory recognition of contingency fees and that ends all arguments about their lawfulness, due to the doctrine of the Sovereignty of Parliament.

 

With the small claims track limit rising to £10,000.00 from 1st April 2013 and then to £15,000.00, or possibly even £25,000.00, contingency fees will have an increasing role to play as obviously they are of greater value and importance where costs are not recoverable from the other side, which obviously applies in small claims track cases. This point was recognized by the Master of the Rolls, Lord Neuberger in his 14th Lecture in the Implementation Programme on 11 May 2012 when he said:

 

“In cases where a claim falls within the no cost-shifting regime, it is possible that, contrary to what some believe, a DBA will be preferable to other forms of funding agreement, including conditional fee agreements.”

 

Contingency fees have been widely used in fields where costs are not recoverable from the other side, especially in CICA claims and in employment tribunals.

 

The whole Motor Insurers’ Bureau Untraced Drivers Scheme is based on contingency fees.

 

This half-hearted measure is pointless in relation to costs-bearing cases and I can envisage few cases where a Damages-Based Agreement would be appropriate, for the solicitor.

 

In cases where costs do not follow the event it is a different matter.

 

Pre-action contingency fee agreements have always been allowed as pre-action work is non-contentious but retrospectively becomes contentious upon issue.  That will change in that damages-based agreements will now be allowed in respect of contentious work, but contingency fees continue to be allowed in relation to non-contentious work.

 

The solution is to enter in to a conditional fee agreement and a contingency fee agreement from Day One.

 

The agreement with the client will be that the contingency fee agreement operates until proceedings are issued at which point it drops away and the conditional fee agreement is deemed to have been in place from the beginning.  This is achieved by a bridging agreement.

 

Absent a contractual agreement with the other side there is no right to costs pre-issue and therefore it does not matter that the conditional fee agreement is not in place.  Costs are only payable by agreement; if they are agreed then there is no problem and if they are not agreed then proceedings will need to be issued at which point the conditional fee agreement comes in to force with effect from the beginning of the case.

 

The potential problem is that fees on an hourly basis, even with a success fee, may be significantly less than the contingency fee would have been.  That will depend upon a combination of the settlement figure and the contingency fee percentage on the one hand and the time spent and the hourly rate on the other hand.

 

Thus where there is a contingency fee agreement you should have a high hourly rate in the conditional fee agreement.

 

Solicitor and own client rates can and should be very much higher than the rates that you are likely to recover on a between the parties basis.

 

This is for two reasons:

 

  • to maximize the alternative “take” to the contingency fee; and

 

  • to maximize the indemnity costs received if, as a claimant, you match or beat your own Part 36

 

Such agreements cannot be used in employment work.

 

Apart from employment cases, such agreements are specifically excluded from the provisions of The Damages-Based Agreements Regulations 2013 by Regulation 1(4) of those same Regulations:

 

“(4) Subject to paragraph (6), these Regulations shall not apply to any damages-based agreement to which section 57 of the Solicitors Act 1974 (non-contentious business agreements between solicitor and client) applies.”

 

The paragraph (6) exception reads:

 

“(6) Where these Regulations relate to an employment matter, they apply to all damages-based agreements signed on or after the date of which these Regulations come into force.”

 

As the Explanatory Note to The Damages-Based Agreements Regulations states:

 

“…section 58AA(9) of the [Courts and Legal Services] Act provides that, where section 57 of the Solicitors Act 1974 (c.47) applies to a DBA (other than one relating to an employment matter) it is not unenforceable only because it does not satisfy the conditions in section 58AA(4), under which these Regulations are made. Accordingly article 1(4) [sic – should read Regulation 1(4) – articles apply to Orders not Regulations] excludes those DBAs to which section 57 of the Solicitors Act 1974 applies from the scope of these Regulations.”

 

Section 57 of the Solicitors Act 1974 has itself been amended by section 98 of the Courts and Legal Services Act 1990 and sections 117 and 221 of, and schedule 16 to, the Legal Services Act 2007, and now reads:

 

57 Non–contentious business agreements

E+W

  • Whether or not any order is in force under section 56, a solicitor and his client may, before or after or in the course of the transaction of any non–contentious business by the solicitor, make an agreement as to his remuneration in respect of that business.

 

  • The agreement may provide for the remuneration of the solicitor by a gross sum or by reference to an hourly rate, or by a commission or percentage, or by a salary, or otherwise, and it may be made on the terms that the amount of the remuneration stipulated for shall or shall not include all or any disbursements made by the solicitor in respect of searches, plans, travelling, taxes, fees or other matters.

 

  • The agreement shall be in writing and signed by the person to be bound by it or his agent in that behalf.

 

  • Subject to subsections (5) and (7), the agreement may be sued and recovered on or set aside in the like manner and on the like grounds as an agreement not relating to the remuneration of a solicitor.

 

  • If on any assessment of costs the agreement is relied on by the solicitor and objected to by the client as unfair or unreasonable, the costs officer may enquire into the facts and certify them to the court, and if from that certificate it appears just to the court that the agreement should be set aside, or the amount payable under it reduced, the court may so order and may give such consequential directions as it thinks fit.

 

  • (6)Subsection (7) applies where the agreement provides for the remuneration of the solicitor to be by reference to an hourly rate.

 

  • If, on the assessment of any costs, the agreement is relied on by the solicitor and the client objects to the amount of the costs (but is not alleging that the agreement is unfair or unreasonable), the costs officer may enquire into—

 

  • the number of hours worked by the solicitor; and

 

  • whether the number of hours worked by him was excessive.”

 

It will be seen that section 57(2) specifically sanctions remuneration by way of a percentage.

 

I have set the contingency fee at 25% including VAT and disbursements. There is no statutory cap on this figure, but I have borrowed it from the maximum permitted by Parliament in personal injury cases, which are analogous in the sense that there is still recovery of costs by agreement with the other side in cases settled pre-issue.

 

Thus I am satisfied that it is a fair and reasonable fee and it is certainly one with which clients are happy.

 

The agreement must be in writing and must be signed by the client (section 57(3) Solicitors Act 1974).

 

I have inserted a default hourly rate of £480 including VAT as that is now the standard rate for personal injury work.

 

The protection and value to the client is that they pay nothing in the event of failure to obtain damages.

 

The client is guaranteed 75% of anything recovered.

 

If the success fee and the contingency percentage are the same, and in personal injury work the maximum is 25% of damages excluding future loss, then:

 

  • it is ALWAYS in the solicitor’s interest to have a conditional fee agreement as that is costs recovered PLUS 25% of damages as a success fee;

 

  • it is ALWAYS in the client’s interest to have a contingency fee agreement as that is 25% LESS costs recovered from the other side, and the Indemnity Principle limits recovery from the other side to a sum equal to 25% of damages.

 

The 25% cap in relation to the contingency fee “take” applies only in personal injury cases, with a 50% cap in relation to all other work, except employment tribunal work where it is 35%, but there will be no success fee cap by reference to damages in conditional fee cases, except in relation to personal injury cases where it will be 25%.

 

All success fees remain subject to the rule that they must not exceed 100% of base costs.

 

Base costs are solicitor and own client costs NOT the sum recovered from the other side on a between the parties’ basis.

 

In non-personal injury cases it will be possible to construct a contingency fee agreement along the lines of “whatever fees which once the as yet unknown recovered costs are taken in to account and set off against that fee, will leave the solicitor with 25%, or 30% or whatever of damages” or to put it another way, a promise that the client will get 75% or 70% or whatever of damages with the solicitor keeping the rest.

 

In Employment Tribunal claims the maximum contingency fee is 35%, including VAT, which, with VAT at 20%, is a contingency fee of 29.17% plus VAT; in other words the profit costs are 29.17% of the sum recovered.

 

In Employment cases, but not any other type of case, counsel’s fees can be charged on top of the contingency fee.

 

The 50% maximum in other cases will give a profit costs figure of 41.66%.

 

From a solicitor’s point of view any deal can be done with counsel, such as

 

  • splitting the contingency fee 50-50;

 

  • splitting the contingency fee in some other way;

 

  • paying counsel win or lose and keeping all of the contingency fee in the event of a win but paying counsel personally in the event of defeat;

 

  • instructing counsel on a conditional fee basis.

 

However generally if a contingency fee is being used it is better for the solicitors’ firm to do the advocacy itself.

 

Interplay with Third Party Funding

 

There appears to be a failure to understand the way funding, as opposed to costs, works.

 

In pre 1 April 2013 Conditional Fee Agreements a client’s success fee is paid by the other side but the third party funder’s fee is paid by the client.

 

If the client is to be the payer in any event then an informed decision needs to be made in each case between these two methods of funding.

 

For example in what looks like a safe case the client may feel better off with a Third Party Funder taking 20% of any damages and agreeing to pay the solicitor in the event of defeat.  The potential loser here is the solicitor who will receive no additional fee for winning but will face no risk.

 

These will be difficult calls and the tension between non-recoverable success fees, contingency fees and third party funding has not been fully considered.

 

In the pre-2000, pre-recovery days there was no third party funding and so the issue has not arisen.

 

Suppose a third party funder was to advertise that it would back any viable road traffic accident case in return for 10% of damages.

 

What would the solicitor’s duty then be? To limit their own success fee to 10%?  To take no success fee at all?

 

Lord Justice Jackson says in favour of Third Party Funding that it provides an additional means of funding litigation, “and for some parties the only means” and, unlike conditional fee agreements does so without “any additional financial burden upon opposing parties,” and that it tends “to filter out unmeritorious cases”.

 

Reflecting his view that recoverability of success fees should be banned Lord Justice Jackson states that it is better for a claimant “to recover a substantial part of damages than nothing at all,” and notes, correctly, that Third Party Funding would “become even more important as a means of financing litigation if success fees under conditional fee agreements become irrecoverable.”

 

Jackson also appears to accept that in the absence of the recoverability of after-the-event insurance Third Party Funding may fill the gap.

 

In referring to Stone and Rolls (in Liquidation) v Moore Stephens (a Firm) [2009] UKHL 39 where the third party funded claimant lost and had not taken out after-the-event insurance to cover its adverse costs risk Lord Justice Jackson said:

 

“These facts illustrate that third party funders can operate satisfactorily in the absence of ATE insurance and they can accept liability for any adverse costs orders”, adding that the risk undertaken by the funder was reflected in the percentage of damages which the funder was entitled to receive in the event of success.

 

What was not addressed is the percentage of damages to be left to the successful third party funded claimant.

 

Thus a clinical negligence action is third party-funded in a post-Jackson world where there is no recoverability of the success fee or after-the-event insurance premium.  The third-party funder agrees to cover any adverse costs order, in other words to be the after-the-event insurer as well as the funder. In those circumstances a percentage take towards the top of the range for the third party funder would not be unreasonable – say 40% of damages.  It agrees to pay a discounted fee to the solicitor in any event, that is the solicitor works under a discounted conditional fee agreement.

 

The solicitor’s conditional fee agreement success fee is capped at 25% of damages.

 

The claimant wins and thus gets 35% of damages awarded.

 

It could in fact be rather less – there may be interest on the third party funding and some irrecoverable solicitor and own client costs.

 

That is why Third Party Funding in an age of non-recoverability of success fees and after-the-event insurance premia risks a re-run of Claims Direct and the Accident Group.

 

I set out below the effect that it has on section 58AA of the Courts and Legal Services Act 1990, so what follows is the amended version of section 58AA:

 

(1) A damages-based agreement which relates to an employment matter and satisfies the conditions in subsection (4) is not unenforceable by reason only of its being a damages-based agreement.

 

(2) But (subject to subsection (9)) a damages-based agreement which relates to an employment matter and does not satisfy those conditions is unenforceable.

 

(3) For the purposes of this section-

 

(a)          a damages-based agreement is an agreement between a person providing advocacy services, litigation services or claims management services and the recipient of those services which provides that-

 

(i)           the recipient is to make a payment to the person providing the services if the recipient obtains a specified financial benefit in connection with the matter in relation to which the services are provided, and

(ii)          the amount of that payment is to be determined by reference to the amount of the financial benefit obtained;

 

 

(b)          a damages-based agreement  relates to an employment matter if the matter in relation to which the services are provided is a matter that is, or could become the subject of proceedings before an employment tribunal. 

 

(4)  The agreement-

 

(a)          must be in writing;

 

(aa)        must not relate to proceedings which by virtue of section 58A(1) and (2) cannot be the subject of an enforceable conditional fee agreement or to proceedings of a description prescribed by the Lord Chancellor;

 

(b)          if regulations so provide, must not provide for a payment above a prescribed amount or for a payment above an amount calculated in a prescribed manner;

 

(c)           must comply with such other requirements as to its terms and conditions as are prescribed; and

 

(d)          must be made only after the person providing services under the agreement has provided prescribed information has complied with such requirements (if any) as may be prescribed as to the provision of information.

 

(5)          Regulations under subsection (4) are to be made by the Lord Chancellor and may make different provision in relation to different descriptions of agreements.

 

(6)          Before making regulations under subsection (4) the Lord Chancellor must consult-

 

(a)          the designated judges,

 

(b)          the General Council of the Bar,

 

(c)           the Law Society, and

 

(d)          such other bodies as the Lord Chancellor considers appropriate.

 

(6A)       Rules of court may make provision with respect to the assessment of costs in proceedings where a party in whose favour a costs order is made has entered into a damages-based agreement in connection with the proceedings.

 

(7)          In this section-

 

“payment” includes a transfer of assets and any other transfer of money’s worth (and the reference in subsection (4)(b) to a payment above a prescribed amount, or above an amount calculated in a prescribed manner, is to be construed accordingly);

 

“claims management services” has the same meaning as in Part 2 of the Compensation Act 2006 (see section 4(2) of that Act).

 

(7A)       In this section (and in the definitions of “advocacy services” and “litigation services” as they apply for the purposes of this section) “proceedings” includes any sort of proceedings for resolving disputes (and not just proceedings in a court), whether commenced or contemplated.

 

(8)          Nothing in this section applies to an agreement entered into before the coming into force    of the first regulations made under subsection (4).

 

(9)          Where section 57 of the Solicitors Act 1974 (non-contentious business agreements between solicitor and client) applies to a damages-based agreement other than one relating to an employment matter, subsections (1) and (2) of this section do not make it unenforceable.

 

(10)        For the purposes of subjection (9) a damages-based agreement relates to an employment matter if the matter in relation to which the services are provided is a matter that is, or could become, the subject of proceedings before an employment tribunal.

CONTENTIOUS BUSINESS AGREEMENTS (CBA)

In Addleshaw Goddard LLP v Wood and Hellard [2015] EWHC B12 (Costs)

the Senior Courts Costs Office, Master Campbell, had a rare opportunity to consider Contentious Business Agreements.

A Contentious Business Agreement (CBA) and a Conditional Fee Agreement (CFA) are mutually exclusive. The judgment is 45 pages long.

The terms of the agreement were that if the action failed Mr Berezovsky, who had entered into the agreement with Addleshaw Goddard, would pay a reduced fee of 50% of normal charges; if the action was successful he would pay the normal rates (level one success fee) and if he recovered a set minimum trigger amount there would be a 100% success fee on top of the normal charges (level two success fee).

The case was settled after Mr Berezovsky had died and the appropriate fee was the highest one, that is the level two success fee. Mr Berezovsky’s solicitors sought recovery of costs from the defendants, who were the Administrators for the now deceased Mr Berezovsky.

There was a dispute as to the actual level of recovery but the court held that, subject to the validity of the CBA, the level two success fee, that is the highest one, had been triggered.

The relevant provisions of the Solicitors Act 1974 in relation to Contentious Business Agreements are sections 59 to 61. Section 70 deals with the application procedure.

Those sections read:-

“”59. Contentious business agreements.

(1) Subject to subsection (2), a solicitor may make an agreement in writing with his client as to his remuneration in respect of any contentious business done, or to be done, by him (in this Act referred to as a “contentious business agreement”) providing that he shall be remunerated by a gross sum or by reference to an hourly rate, or by a salary, or otherwise, and whether at a higher or lower rate than that at which he would otherwise have been entitled to be remunerated.

(2) Nothing in this section or in sections 60 to 63 shall give validity to —

(a) any purchase by a solicitor of the interest, or any part of the interest, of his client in any action, suit or other contentious proceeding; or

(b) any agreement by which a solicitor retained or employed to prosecute any action, suit or other contentious proceeding, stipulates for payment only in the event of success in that action, suit or proceeding; or

(c) any disposition, contract, settlement, conveyance, delivery, dealing or transfer which under the law relating to bankruptcy is invalid against a trustee or creditor in any bankruptcy or composition.

  1. Effect of contentious business agreements.

(1) Subject to the provisions of this section and to sections 61 to 63, the costs of a solicitor in any case where a contentious business agreement has been made shall not be subject to taxation or (except in the case of an agreement which provides for the solicitor to be remunerated by reference to an hourly rate) to the provisions of section 69.

(2) Subject to subsection (3), a contentious business agreement shall not affect the amount of, or any rights or remedies for the recovery of, any costs payable by the client to, or to the client by, any person other than the solicitor, and that person may, unless he has otherwise agreed, require any such costs to be taxed according to the rules for their taxation for the time being in force.

(3) A client shall not be entitled to recover from any other person under an order for the payment of any costs to which a contentious business agreement relates more than the amount payable by him to his solicitor in respect of those costs under the agreement.

(4) A contentious business agreement shall be deemed to exclude any claim by the solicitor in respect of the business to which it relates other than —

(a) a claim for the agreed costs; or

(b) a claim for such costs as are expressly excepted from the agreement …

  1. Enforcement of contentious business agreements.

(1) No action shall be brought on any contentious business agreement, but on the application of any person who —

(a) is a party to the agreement or the representative of such a party; or

(b) is or is alleged to be liable to pay, or is or claims to be entitled to be paid, the costs due or alleged to be due in respect of the business to which the agreement relates,

the court may enforce or set aside the agreement and determine every question as to its validity or effect.

(2) On any application under subsection (1), the court —

(a) if it is of the opinion that the agreement is in all respects fair and reasonable, may enforce it;

(b) if it is of the opinion that the agreement is in any respect unfair or unreasonable, may set it aside and order the costs covered by it to be assessed as if it had never been made;

(c) in any case, may make such order as to the costs of the application as it thinks fit.

(3) If the business covered by a contentious business agreement (not being an agreement to which section 62 applies) is business done, or to be done, in any action, a client who is a party to the agreement may make application to a costs officer of the court for the agreement to be examined.

(4) A costs officer before whom an agreement is laid under subsection (3) shall examine it and may either allow it, or, if he is of the opinion that the agreement is unfair or unreasonable, require the opinion of the court to be taken on it, and the court may allow the agreement or reduce the amount payable under it, or set it aside and order the costs covered by it to be assessed as if it had never been made.

(4A) Subsection (4B) applies where a contentious business agreement provides for the remuneration of the solicitor to be by reference to an hourly rate.

(4B) If on the assessment of any costs the agreement is relied on by the solicitor and the client objects to the amount of the costs (but is not alleging that the agreement is unfair or unreasonable), the costs officer may enquire into —

(a) the number of hours worked by the solicitor; and

(b) whether the number of hours worked by him was excessive.

(5) Where the amount agreed under any contentious business agreement is paid by or on behalf of the client or by any person entitled to do so, the person making the payment may at any time within twelve months from the date of payment, or within such further time as appears to the court to be reasonable, apply to the court, and, if it appears to the court that the special circumstances of the case require it to be re–opened, the court may, on such terms as may be just, re–open it and order the costs covered by the agreement to be assessed and the whole or any part of the amount received by the solicitor to be repaid by him…

  1. Assessment on application of party chargeable or solicitor.

(1) Where before the expiration of one month from the delivery of a solicitor’s bill an application is made by the party chargeable with the bill, the High Court shall, without requiring any sum to be paid into court, order that the bill be assessed and that no action be commenced on the bill until the assessment is completed.

(2) Where no such application is made before the expiration of the period mentioned in subsection (1), then, on an application being made by the solicitor or, subject to subsections (3) and (4), by the party chargeable with the bill, the court may on such terms, if any, as it thinks fit (not being terms as to the costs of the assessment), order —

(a) that the bill be assessed ; and

(b) that no action be commenced on the bill, and that any action already commenced be stayed, until the assessment is completed.

(3) Where an application under subsection (2) is made by the party chargeable with the bill —

(a) after the expiration of 12 months from the delivery of the bill, or

(b) after a judgment has been obtained for the recovery of the costs covered by the bill, or

(c) after the bill has been paid, but before the expiration of 12 months from the payment of the bill;

no order shall be made except in special circumstances and, if an order is made, it may contain such terms as regards the costs of the assessment as the court may think fit.

(4) The power to order assessment conferred by subsection (2) shall not be exercisable on an application made by the party chargeable with the bill after the expiration of 12 months from the payment of the bill…”

The defendants argued that this was in fact a CFA and not a CBA and that sections 59 to 61 of the Solicitors Act 1974 therefore had no application.

The document looked like a CFA and was structured like a CFA and the letter referring to it was headed “Discounted Conditional Fee Agreement”. Nevertheless the court found that it was in fact a Contentious Business Agreement.

The court held that the CBA entered into between a firm of solicitors and an experienced businessman was valid, and, in the circumstances reasonable. There was no reasonable basis for the defendants to be allowed to assess these charges.

The case also dealt in detail with a solicitor’s right to a lien and the law in relation to solicitors’ charging orders for costs.

The court also held that the fact that a solicitor gets paid something in any event in a No Win Lower Fee Agreement as compared with a No Win No Fee Agreement, is of less relevance in relation to the success fee where the success fee is not recoverable from the other side. Thus the court distinguished the case of Gloucestershire County Council v Evans [2008] 2 Costs LR 308.

The court said this at paragraph 76 of the judgment:-

“Both sides relied on Gloucestershire CC. I agree with Mr Atherton that “costs at risk” and the fact that win or lose, AG would recover the Reduced Fee, are relevant factors to take into account when considering the reasonableness of the success fee, but that is tempered by the fact that that was a case about costs between the parties. The position here is once removed, in the sense that, contrast Gloucestershire CC where it was the paying party saying that the success fee was too high, here we are addressing charges as between solicitor-and-own client under a contractual agreement which has provided for its level. It follows that in accepting Mr Bacon’s submission, I am not doing so simply because agreements embodying such terms, in particular that the success fee can be 100%, have been permitted since 1999 under Section 58 Access to Justice Act 1998. On the contrary, in the circumstances as they have been explained to me, I do not consider that the success fee is either unreasonable or unfair, having been commercially negotiated by both sides in the way I have described, so the point fails.”

In fact the court is wrong in that such arrangements were sanctioned by the Courts and Legal Services Act 1990 and had been permitted since 1995.

Contentious Business Agreements essentially deprive the client of the right to challenge the agreed rate of remuneration although the court can still inquire into the number of hours worked. Thus they have attractions for solicitors.

However given that restriction, which does not apply to Conditional Fee Agreements, the courts are likely to look more carefully at the validity of such agreements.

Few lawyers or judges realise that the Solicitors Act 1974 allowed a form of Conditional Fee Agreement long before the Courts and Legal Services Act 1990 and the 1995 Regulations. The Act also specifically sanctions Pre-Action Contingency Fee Agreements and the Damages-Based Agreements Regulations 2013 specifically state that nothing in those regulations affects those provisions.

 

SEARS TOOTH AGREEMENT

 

A Sears Tooth agreement is a deed assigning the client’s settlement, or part of it, to his or her solicitors so as to enable those solicitors to take costs as, effectively, a first charge on damages.

 

The name is derived from the case of

 

Sears Tooth v Payne Hicks Beach and others [1997] 2 FLR 116.

 

There the wife in divorce proceedings wished to instruct new solicitors, Sears Tooth, while fees were outstanding to her former solicitors Payne Hicks Beach.

 

She entered into a deed assigning to Payne Hicks Beach part of her rights in the ancillary relief proceedings sufficient to satisfy the outstanding bill.

 

Ancillary relief orders were made in her favour and Payne Hicks Beach obtained judgment against her for costs.

 

The court held that such an agreement was not champertous but a client proposing to enter in to such an arrangement should obtain independent legal advice first.  The court should be notified of any such arrangement.

 

Failure to serve Form N251

 

In Yeo MP v Times Newspaper Ltd [2014] EWHC 2853 (QB)

 

the Queen’s Bench Division of the High Court granted relief from sanctions in relation to the claimant’s failure to file Notice of Funding with the Particulars of Claim where the claimant had given clear notice of the funding situation at the outset of the correspondence with the other side.

 

The application was not opposed.

 

Additional liabilities, that is the success fee and the after-the-event insurance premium, remain recoverable in defamation cases and this is such a case.

 

On 9 December 2013 Mr Yeo entered into a conditional fee agreement with his solicitors and also took out after-the-event insurance and notice was served on the defendant on 13 December 2013.

 

However Form N251 was not filed or served when the claim form was issued as required by CPR 44.15 (1) and paragraph 19 of the Costs Practice Direction. CPR 44.3B (1) sets out the consequences of failure to comply:-

 

“Unless the court orders otherwise, a party may not recover as an additional liability –

 

 

(1)  additional liability for any period during which that party failed to provide information

about a funding arrangement in accordance with a rule, practice direction or court order;”

 

The claimant’s solicitors became aware on Friday 11 July 2014 of the omissions and filed and served Form N251 on Monday 14 July 2014, the next working day.

 

Here the court, applying Denton, found that “the breach is not a serious or practically significant” one. The defendant had previously had all of the relevant information.

 

The reason that the breach had occurred was an error and was not deliberate. The error was rectified promptly once noticed. The application for relief was made promptly.
The court ordered that “Form N251 be treated as filed and served on 19 March 2014”, the day the claim form was issued.

 

In Ultimate Products Ltd and another v Woolley and another [2014] EWHC 2706 (Ch)

 

the Chancery Division of the High Court applied the Denton test and upheld the decision of the Master in granting relief from sanctions when the Claimant had failed to serve Notice of Change of Funding when a new conditional fee agreement was entered into.

 

The judge found that the breach was not serious or significant.

 

The facts of the case are curious. The Claimant was represented in a trademark and passing off action under a conditional fee agreement with success fees of 32% and 30% for solicitor and counsel respectively, which fees were not of course disclosed to the other side on Form N251.

 

18 months later, in the run up to trial, the Claimant and its solicitors entered into a new conditional fee agreement with a 100% success fee for solicitor and counsel. No new Form N251was served but the solicitors had previously written to the Defendant as follows:-

 

“We also take this opportunity to inform you that on the expiry of the 21 day period for acceptance of this offer we will be increasing the success fee in our CFA agreement with our client. This is in response to the higher level of cost and risk that flows from the matter proceeding to trial.”

 

The Claimant accepted that CPR 44.15 (2) required a new Form N251 to be served and that this was not done and hence the application for relief from sanctions.

 

The Master – pre Denton – granted relief and the judge here upheld that decision stating that the failure was neither serious nor significant. Service of a fresh Form N251 would have given the Defendant no new information.

 

Moving on the judge referred to the approach set out in Denton that once a finding had been made that the failure was neither serious nor significant “it is unlikely to need to spend much time on the second and third stages.”

 

The judge found that the Master had “correctly characterised” the failure “as a slip, mistake or oversight” and that to find that that was a “bad reason” was “inappropriately harsh”.

 

Even if it was a bad reason regard had to be had to all of the circumstances of the case; that is stage 3 and on that basis alone relief should be granted.

 

Comment

 

The decision on the particular application is clearly right and may well have been reached pre Denton, as indeed it was by the Master at first instance.

 

However it seems unlikely that the Claimant obtained a “win” within the definition in the original conditional fee agreement before that agreement was ended, not varied, by the new conditional fee agreement. By operation of the indemnity principle the Claimant should recover no costs, either base costs or a success fee, prior to the second conditional fee agreement being entered into shortly before trial.

 

Even if the conditional fee agreement was retrospective or backdated I have my doubts as to whether that constitutes a lawful retainer and in any event in my view it is void on public policy grounds. If it did constitute a lawful retainer justifying recovery of costs from the other side then anyone with a pre-1 April 2013 case would enter into a conditional fee agreement now with a recoverable success fee. That is clearly against the intention of Parliament as expressed in the Legal Aid, Sentencing and Punishment of Offenders Act 2012.

 

Indeed everyone could wait until just before trial in any case and then enter into a backdated conditional fee agreement with a recoverable 100% success fee.

 

Also the court has failed to take account of the decision of the Supreme Court in Coventry and others v Lawrence and another (No 2) [2014] UKSC 46, which was given over a week before judgment in this matter.
This looks like the most Pyrrhic of Pyrrhic victories.

 


 

Chapter 3 – No Win No Fee No Worries

 

The Success Fee and The Cap

Myth and Reality

 

Conditional fees differ from U.S. style contingency fees only in that it is not permissible to simply agree a “percentage take”. The Conditional Fee Agreements Order 1995 stipulates a maximum increase of 100% per cent (the “success fee”) but does not impose a percentage cap (“the cap”). However as far as the public is concerned the key consideration is the cap — i.e. will the solicitor guarantee to limit the percentage of damages taken in costs?

 

Discussions about the percentage success fee (as opposed to the cap), the assessment of risk and which fees form the base sum to be increased by a maximum of 100%, are lost on most solicitors, let alone the public. Amongst those who have considered the success fee in detail there is a widespread but erroneous view that it is the risk of losing which is the main factor in calculating the success fee. It is not!

 

Understanding this is the key to working successfully on a conditional fee basis.

 

The Statutory Background

 

Conditional fees were made lawful by Section 58 of the Courts and Legal Services Act 1990 and that section, without using the term, created the concept of the success fee. By contrast the cap, which actually protects the client, is neither mentioned nor alluded to in the Act or the Conditional Fee Agreements Order 1995. However the Conditional Fee Agreements Regulations 1995 make it mandatory, in a Conditional Fee Agreement, to state whether or not there is a cap but impose no requirement to actually have one.

 

Why Parliament chose to use the concept of a “success fee” rather than the cap is a mystery but when Parliament extends the operation of conditional fees probably this autumn, 1998, it is to be hoped that the existing regulations will be replaced by a section reading:

 

It shall be unlawful for a solicitor to charge a client in a conditional fee case more than 25%, including Value Added Tax, of the damages actually recovered for that client.

 

However in the meantime we must deal with the law as it is, and the relevant parts of Section 58 read:

 

(2)          Where a conditional fee agreement provides for the amount of any fees to which it applies to be increased, in specified circumstances, above the amount which would be payable if it were not a conditional fee agreement, it shall specify the percentage by which that amount is to be increased.

 

(4)          In this section “specified proceedings” means proceedings of a description specified by order made by the Lord Chancellor for the purposes of subsection (3).

 

(5)          Any such order shall prescribe the maximum permitted percentage for each description of specified proceedings.

 

(6)          An agreement which falls within subsection (2) shall be unenforceable if, at the time when it is entered into, the percentage specified in the agreement exceeds the prescribed maximum percentage for each description of proceedings to which it relates.

 

(9)          Rules of court may make provision with respect to the taxing of any costs which includes fees payable under a conditional fee agreement.

 

Thus the scheme of the Act is to limit the amount by which the solicitor’s costs can be raised, not to limit the percentage of damages that can be taken.

 

This, as we will see, in Mr Jones’ example below has bizarre consequences.

 

The Consequences for Mr Jones

 

Five years later Parliament approved The Conditional Fee Agreements Order 1995. Article 3 reads:

 

“For the purpose of Section 58.(5) of the Courts and Legal Services Act 1990 the maximum permitted percentage by which fees may be increased in respect of each description of proceedings specified in article 2 is 100%”.

 

Article 2 includes personal injury proceedings.

 

Thus under the scheme laid down by Parliament solicitors may double their fees, but no more, and may ignore the consequences to the client.

 

The following is a letter not to send even though it complies with these regulations.

 

Dear Mr Jones,

 

I am pleased that the Judge found in your favour and indeed I have already received the damages cheque for £5,000.

 

My Firm’s costs total £6,000 of which I have recovered £4,000 from the other side.

 

You will recall that under the terms of the conditional fee agreement we agreed that I could increase my costs by 100% if you won. We agreed that figure because this was a risky case as shown by the fact that it went to trial.

 

The effect of increasing my costs by 100% is that they now total £12,000 and, as mentioned above, I have received £4,000 costs from the other side leaving a shortfall of £8,000, but I have applied the £5,000 damages and so the balance due to me from you is £3,000. To make this easy to follow I have prepared a little table.

 

£

My firm’s basic costs                                      6,000

Success fee                                                       6,000

Total                                                                      12,000

Less costs from other side                           4,000

Balance                                                                8,000

Less damages applied to costs                   5,000

Balance due to me from you                       3,000

 

Please let me have your cheque in due course.

 

You will recall that for £85 we insured against you having to pay the other side’s costs and our own disbursements if we lost. This means that if you had lost it would have cost you nothing but as you have won it has cost you £3,000.

 

Never mind. It’s a funny old world.

 

I recall that you wanted the conditional fee scheme because you could not afford lawyer’s fees. A wise decision!

 

I will be pleased to act for you again in the future — after your forthcoming bankruptcy has finished.

 

Alternatively next time you are a passenger in a bus and you get injured you might find it cheaper just to admit liability.

 

Yours sincerely

 

Some scheme. Some protection.

 

The Need for a Cap

 

Of course, as many of those involved in looking at conditional fees realised, the “success fee” concept is hopelessly flawed. One only has to look at why it is not used in those jurisdictions which have contingency fees. Those jurisdictions recognise that the cap is the client’s protection.

 

Thus in the Conditional Fee Agreements Regulations 1995 Parliament made its first faltering steps towards the cap. Thus Regulation 3:

 

An agreement shall state:‑

 

(a)          the particular proceedings or parts of them to which it relates (including whether it relates to any counterclaim, appeal or proceedings to enforce a judgment or order);

 

(b)          the circumstances in which the legal representative’s fees and expenses or part of them are payable;

 

(c)           what, if any, payment is due :-

 

(i)            upon partial failure of the specified circumstances to occur

 

(ii)           irrespective of the specified circumstances occurring; and

 

(iii)          upon termination of the agreement for any reason;

 

(d)          the amount payable in accordance with sub-paragraphs (b) or (c) above or the method to be used to calculate the amount payable; and in particular whether or not the amount payable is linked by reference to the amount of any damages which may be recovered on behalf of the client. (my italics)

 

Thus the Conditional Fee Agreement does not have to contain a cap but it must state whether or not there is a cap.

 

The rest of Regulation 3 is very difficult to follow. It is primarily concerned with what payments are due when there is not necessarily a win, e.g. because one or other party terminates the agreement, or because the agreement stipulates that disbursements are payable in any event. These possibilities must be covered in advance in the agreement.

 

However the section italicised above refers to a limit of these costs by reference to the amount of damages recovered and yet by definition there will not necessarily be any damages and yet certain payments may be due. The italicised section should be a free‑standing regulation applying unequivocally to all aspects of a solicitors charges to his client.

 

The Law Society, to its credit, saw the reality and in its model Conditional Fee Agreement imposed a 25% cap plus VAT on damages taken by way of a success fee, and thus the gap between solicitor and own client costs and inter-partes costs does not need to be brought into either the 25% cap figure, or the maximum 100% success fee.

 

I strongly recommend that practitioners include all charges to the client including any solicitor and own client costs and VAT in the 25% cap but not in the percentage success fee. (“the Underwoods Method”).

 

In Conditional fees speak the full solicitor and own client costs –which include any costs received from the other side – are known as “base costs”.

 

The Options for Mr Jones

 

To make this clear let us return to poor Mr Jones and look at the three options.

 

A 100% success fee but no cap.

 

B 100% success fee but a 25% cap on success fee

 

C 100% success fee but a 2.5% cap on all fees charged to client.

 

The damages recovered in each case are £5,000.

 

A No Cap

 

In the position set out in the letter to Mr Jones

 

£

Base costs                                                                           6,000

Less received from other side                                    4,000

Balance                                                                                2,000

Success fee (100% of basic costs)                             6,000

Balance actually charged to client                             8,000

Damages                                                                             5,000

Money to client                                                 Minus  3,000

 

B Cap on Success Fee only

 

Base costs                                                                           6,000

Less received from other side                                    4,000

Balance                                                                                2,000

Success fee (£6,000 but capped

at 25% of £5,000)                                                              1,250

Charged to client                                                              3,250

Damages                                                                             5,000

Balance due to client                                                      1,750

 

Actual success fee (£1,250 on £6,000) = 20.833%

 

Thus in B, applying the 100% success fee and limiting that success fee to 25% in accordance with the Law Society’s agreement the solicitor actually takes £3,250 from the client’s £5,000. I have excluded VAT for the sake of simplicity (!) but you are entitled to add that to the £3,250 and thus:

 

3,250.00
VAT at 17.5% 568.75
Total costs 3,818.75
Balance to client 1,181.25
TOTAL 5,000.00

 

You might like to undertake an exercise to compose a letter to Mr Jones explaining that his cheque for £1,181.25 out of £5,000.00 damages really does represent 75% of his damages and that the £3,818.75 taken by you out of his £5,000.00 really is a 25% cap on the success fee.

 

C All Costs to Client Capped – The Underwoods Method

£

Base costs 6,000
Less received from other side 4,000
Balance 2,000
Success fee (£6,000 but capped at 25% of £5,000) 1,250
But total charged to client capped at 25% of damages

Therefore charged to client

Damages

Balance to client

1,250

5,000

3,750

 

Actual success fee (£1,250 charged less base costs of £2,000 = minus £750)

 

Minus £750 on £6,000 = Minus 12.5%

 

Thus in example C in order to ensure that the client gets 75% of the damages we have actually foregone part of the Base Costs as well as taking no success fee and thus there is a negative success fee.

 

Only the Underwoods Method fully protects the client, i.e. guarantees that the client will get 75% of his or her damages.

 

In return for always protecting the client in this way you should also aim to achieve 25% of the damages by way of an additional fee that is additional to the costs cheque received from the Defendant’s insurers. To maximise that chance I advise always having the success fee in the agreement as 100%, unless in a particular case you wish to make no charge to the client, e.g. because the client is a friend, relative, minor, client who gives you a lot of work or whatever. In these cases the correct percentage is 0%, i.e. you will take none of the damages.

 


 

SIGNATURE REQUIREMENTS IN RELATION TO CONDITIONAL FEE AGREEMENTS, DAMAGES-BASED AGREEMENTS AND CONTINGENCY FEE AGREEMENTS

 

Here I consider which, if any, of the following types of agreement require signature, and if so, whether an electronic signature is valid:

 

  1. Conditional Fee Agreements

 

  1. Damages-Based Agreements.

 

  1. Contingency Fee Agreements.

 

SUMMARY

 

Conditional Fee Agreements – no signature required.

 

Damages-Based Agreements – no signature generally required.

 

Contingency Fee Agreements – physical signature required in all cases; electronic signature not valid.

 

Conditional Fee Agreements

 

There is no statutory or secondary legislation that requires conditional fee agreements to be signed and consequently the law relating to electronic signatures is of no relevance as there is no requirement for any signature in the first place.

 

Section 58 of the Courts and Legal Services Act 1990, as amended, which governs conditional fee agreements, provides at Section 58(3), as follows:

 

“(3)        The following conditions are applicable to every conditional fee agreement –

 

(a)          it must be in writing;
(b)          it must not relate to proceedings which cannot be the subject of an enforceable conditional fee agreement; and
(c)           it must comply with such requirements (if any) as may be prescribed by the Lord Chancellor.”

 

This is part of a lengthy and detailed part of the Act where Parliament has gone to great lengths to set out what is required, permitted and prohibited in respect of conditional fee agreements and has done so by primary legislation. It pointedly does not state a requirement for the agreement to be signed.

 

My view is reinforced by the fact that, as we will see later, in relation to non-contentious business agreements, the term used to refer to contingency fee agreements in section 57 of the Solicitors Act 1974, Parliament has set out a clear requirement that contingency fee agreements must be signed.  In my view it is clear that Parliament has differentiated between conditional and contingency fee agreements and I am satisfied beyond doubt that a conditional fee agreement does not need to be signed for it to be valid and enforceable.

 

The Conditional Fee Agreements Order 2013 does not require a conditional fee agreement to be signed.

 

As there is no requirement for a conditional fee agreement to be signed at all, the issue of the validity of an electronic signature does not apply.

 

Nevertheless from an evidential point of view, that is to prove that the client did indeed enter in to, and agree to, the conditional fee agreement, my clear advice is that it should always be physically signed by both parties.

 

Damages-Based Agreements

 

Damages-based agreements are creatures of statute, specifically section 45 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012, which amends section 58AA of the Courts and Legal Services Act 1990.

 

Section 58AA(4)(a) states that the agreement “must be in writing”.  There is no requirement for a signature in what is a lengthy section running to 10 subsections.

 

Again this is in marked contrast to section 57(3) of the Solicitors Act 1974 which requires that a non-contentious business agreement, which includes contingency fee agreements, “shall be in writing and signed…..”

 

Thus I am satisfied that there is no statutory requirement for a damages-based agreement to be signed.

 

The secondary legislation governing damages-based agreement is The Damages-Based Agreements Regulations 2013.

 

Regulation 3 deals with “Requirements of an agreement in respect of all damages-based agreements” and there is no requirement that a damages-based agreement be signed.

 

Regulation 5 imposes significant extra regulatory requirements in relation to employment damages-based agreements, but again there is no requirement for signature.

 

Regulation 6 does require signature in one, limited, circumstance:

 

“6.          In an employment matter, any amendment to a damages-based agreement to cover additional causes of action must be in writing and signed by the client and the representative”.

 

Thus Parliament has specifically required signature, by both parties, in this one instance.

 

It follows that signature is NOT required in any other circumstance in a damages-based agreement.  The Explanatory Notes, not part of the Regulations, reinforces this view as they state:

 

“These Regulations apply to all DBAs, including those which relate to employment matters, entered into or signed (my italics) on or after the date on which they come into force”.

 

Thus the Explanatory Notes, by the use of the word “or” envisage an unsigned DBA.  The Notes also say “Regulation 6 specifies that additional causes of action can be added to the agreement by written and signed amendment”, again making the point that these requirements apply only in that circumstance.

 

As there is no requirement for a damages-based agreement to be signed at all, the issue of the validity of an electronic signature does not apply.

 

Nevertheless from an evidential point of view, that is to prove that the client did indeed enter into, and agree to, the damages-based agreement, my clear advice is that it should always be physically signed by both parties.

 

Contingency Fee Agreements

 

Contingency fee agreements covering non-contentious work are specifically excluded from the provisions of The Damages-Based Agreements Regulations 2013 by Regulation 1(4) of those Regulations:

 

“(4)        Subject to paragraph (6), these Regulations shall not apply to any damages-based agreement to which section 57 of the Solicitors Act 1974 (non-contentious business agreements between solicitor and client) applies”.

 

Section 57(3) of the Solicitors Act 1974 provides:

 

(3)          The agreement shall be in writing and signed by the person to be bound by it or his agent in that behalf”.

 

That is a clumsily worded provision as clearly in any contract both parties are to be bound, otherwise it is not a contract.

 

In the context of the Solicitors Act 1974 generally it is clear that this is a requirement that the client signs the non-contentious business agreement but my clear advice is that both parties, that is client and solicitor, should sign the contract.

 

Thus we have established that a contingency fee agreement does need to be signed.

 

The question then arises as to whether an electronic signature suffices.  Electronic signatures are governed by the Electronic Communications Act 2000.

 

Section 7 of the 2000 Act states:

 

7  Electronic signatures and related certificates

 

(1)     In any legal proceedings—

 

(a)       an electronic signature incorporated into or logically associated with a particular electronic communication or particular electronic data, and

 

(b)       the certification by any person of such a signature,

shall each be admissible in evidence in relation to any question as to the authenticity of the communication or data or as to the integrity of the communication or data.

 

(2)       For the purposes of this section an electronic signature is so much of anything in electronic form as—

 

(a)       is incorporated into or otherwise logically associated with any electronic communication or electronic data; and

 

(b)       purports to be so incorporated or associated for the purpose of being used in establishing the authenticity of the communication or data, the integrity of the communication or data, or both.

 

(3)       For the purposes of this section an electronic signature incorporated into or associated with a particular electronic communication or particular electronic data is certified by any person if that person (whether before or after the making of the communication) has made a statement confirming that—

 

(a)     the signature,

 

(b)     a means of producing, communicating or verifying the signature, or

 

(c)     a procedure applied to the signature.”

 

This has the effect of making all electronic signatures admissible in legal proceedings, but that does not of itself overturn any statutory requirement for a traditional signature; that is dealt with by section 8.

 

Section 8 allows for modification of any enactment or subordinate legislation by way of statutory instrument to allow for an electronic signature where the original legislation requires a conventional signature (Section 8(2)(c)).

 

No such statutory instrument has been laid in relation to section 57(3) Solicitors Act 1974 and thus an electronic signature is not valid on a contingency fee agreement and any such agreement lacking the client’s physical signature is void.

 

However my view is that if a client prints off an electronically communicated contingency fee agreement and signs the printed copy and scans in that printed copy and emails it to the solicitor, then there is compliance with section 57(3) and the contingency fee agreement is valid.

 

 

ASSIGNMENT OF CONDITIONAL FEE AGREEMENTS

 

This is one of the elephants in the Jackson room, entirely unaddressed in the Jackson Report, the implementation speeches, the Legal Aid, Sentencing and Punishment of Offenders Act 2012 or the Conditional Fee Agreements Order 2013.

 

The issue is thrown into sharp relief by the abolition of recovery of success fees.  If a pre 1 April 2013 Conditional Fee Agreement is assignable then the success fee remains recoverable; if not then in a post 31 March 2013 “assignment” the success fee is not recoverable and the defendant tortfeasor receives a windfall.  There is also an issue as to whether any costs, that is base costs as well as the success fee, are recoverable for work done before the non-assignment. On the face of it there is no valid retainer and therefore no recovery of any fee.

 

In Jones v Spire Healthcare Ltd, Liverpool County Court 11 September 2015 case number A13YJ811

District Judge Jenkinson held that a Conditional Fee Agreement entered into between the claimant Ms Jones and the first firm of solicitors had not been validly assigned to the second firm of solicitors.

On 3 February 2012 the claimant entered into a Conditional Fee Agreement with Barnetts Solicitors which was valid according to the regulations as they then stood and on 17 January 2014 Barnetts became insolvent and administrators were appointed and sold that firm’s personal injury work to another firm of solicitors, SGI Legal LLP.

On 21 January 2014 a document entitled ‘Deed of Assignment’ was executed between the administrators of Barnetts and SGI Legal LLP which sought to assign, among other things, the benefits and obligations of 228 retainers between Barnetts and various clients, including Ms Jones, to SGI Legal LLP.

On the same day SGI Legal LLP wrote to Ms Jones in what the court called ‘entirely proper terms’ explaining that her claim had been transferred to them and that they were prepared to act for her on the basis of a Conditional Fee Agreement that she had entered into with Barnetts. They made it clear it was entirely up to Ms Jones as to whether or not she wished to instruct them or to instruct another firm of her choice.

Ms Jones agreed.

On 27 January 2014 she executed another document, again entitled ‘Deed of Assignment’ where she sought to assign both the benefit and obligations of her retainer with Barnetts to SGI Legal LLP.

In fact the lawyer dealing with the matter transferred from Barnetts to SGI Legal LLP but the court found ‘as a fact, and on a balance of probabilities, that any decision by the Claimant to transfer her instructions to SGI Legal LLP was motivated by the unexpected insolvency of her former solicitors, and the ease of continuing her claim through an equally competent personal injury firm, who already had the file, and who were prepared to continue to act on the same basis. I find that the decision was in no way influenced by the transfer of Mr Eccles to SGI Legal LLP, even if Ms Jones knew about this, which on the evidence available I consider it unlikely that she did’.

The claim was settled by acceptance of a Part 36 offer which imputes an entitlement to costs. However the paying party contended that there was no entitlement to costs in this case as:

(a)          The purported assignment of the conditional fee agreement was not valid; in fact it was a novation whereby SGI Legal LLP had entered into a new agreement with Ms Jones based upon the terms of the original Conditional Fee Agreement between her and Barnetts.

(b)          While the CFA with Barnetts was valid at the time it was entered, the effect of subsequent changes to the rules meant that the CFA, as re-entered by way of such novation was unenforceable.

The court correctly stated that the general principle is that a contract involving personal skill or qualifications is not capable of being assigned. The receiving party relied upon an exception to that general rule which it submitted applied following the decision in Jenkins v Young Brothers Transport Ltd (2006) 1 WLR 3189. In that case the solicitor acting for Mr Jenkins changed firms and the Conditional Fee Agreement was assigned from the first firm to the second and then from the second firm to the third firm when the solicitor again moved.

The judge there held that the Conditional Fee Agreement could be assigned on the basis that Mr Jenkins was loyally following an individual solicitor in which he had considerable trust or confidence from one firm to another and in that case the judge said:

“Whether, absent that trust and confidence, a CFA could validly be assigned is not a matter upon which it has been necessary for us to reach a conclusion.”

Here the judge distinguished that case and also pointed out that the Court of Appeal in Davies v Jones [2009] EWCA Civ 1164 suggested that the case may have been wrongly decided by saying:

“I have some doubt whether the relevant benefit and burden were correctly described.”

Due to the facts of the matter as set out above the judge held that here Ms Jones was not motivated in any way by particular trust and confidence in a particular fee earner, even though he had in fact transferred, and therefore held that the narrow exception to the general rule against the assignment of personal contracts as set out in Jenkins did not apply here and that ‘existing well established common law applies, and such an assignment is not possible’.

However the judge held that the benefit of the Conditional Fee Agreement, that is the right to be paid in the event of the claim being successful, had been validly assigned to SGI Legal LLP allowing the claimant ‘to recover the costs that would otherwise have been payable to Barnetts as a consequence of the subsequent settlement of this case’.

The judge found that there was a novation.

Clearly SGI Legal LLP would have been entitled to its costs going forward under the new Conditional Fee Agreement but as that simply replicated the old agreement, and there was no fresh agreement, it failed to satisfy the new provisions of the Conditional Fee Agreements Order 2013, specifically in that it did not impose the damages-based cap at 25% of general damages and past special damages.

Consequently the new retainer was invalid and did not allow recovery of SGI Legal’s costs.

At paragraph 25 the court said:

“25.        In summary, therefore, I find as follows:-

(a)          The conditional fee agreement between Ms Jones and Barnetts has not been assigned to SGI Legal LLP. Accordingly, and on simple application of the indemnity principle, it is not possible to base a claim for costs incurred by SGI Legal LLP parasitic to the terms of that CFA, valid as it was when entered with Barnetts;

(b)          The benefit of the retainer between Barnetts and Ms Jones has been validly assigned to SGI Legal LLP, and the Claimant is accordingly entitled to claim the costs incurred by Barnetts;

(c)           The agreement between Ms Jones and SGI Legal LLP was a novation, based on the terms of the original CFA with Barnetts, but taking effect from 27 January 2014. However, at that stage the CFA fell foul of the regulations which had been amended since the date that the CFA was originally validly entered with Barnetts. It is accordingly rendered unenforceable by section 58 (1) of the 1990 Act, and there is therefore no enforceable retainer upon which a claim for the costs incurred by SGI Legal LLP can be based.”

At paragraph 26 the judge said that the claimant could only recover the costs incurred by Barnetts plus ‘potentially, disbursements incurred by SGI Legal LLP’.

Comment

This is a confusing and inconsistent judgment.

The central point concerning problems with the Jenkins case may well be right. However I do not see how, given the clear finding at paragraph 25(a) that there has been no assignment of the Conditional Fee Agreement. The judge then found at paragraph 25(b) that the benefit of the retainer between the parties to that unassigned Conditional Fee Agreement, Barnetts and Ms Jones has been validly assigned to the new solicitors SGI Legal LLP.

There is no doubt that the original Conditional Fee Agreement between Ms Jones and Barnetts was valid and therefore that was the retainer between them and if that agreement, being the retainer, ends, and is not assigned, then it seems to me that the retainer also ends and therefore paragraph 25(a) and (b) cannot both be correct.

Thus the judge appears to be holding that there was a retainer of some other kind between the original solicitors, Barnetts, and Ms Jones which was capable of valid assignment.

However at paragraph 25(c), in relation to the arrangements between Ms Jones and SGI Legal LLP, the judge says there is no valid CFA between Ms Jones and SGI Legal LLP and no other retainer either.

I cannot see the logic of that. Either the CFA is the complete and only retainer, or it is not. If it is not, which appears to be finding at paragraph 25(b) then why cannot there be a retainer outside the CFA between Ms Jones and SGI Legal LLP?

If there is no retainer how can SGI Legal LLP possibly recover disbursements – see paragraph 26?

Overall this judgment has the bizarre result that SGI Legal LLP may be able to claim disbursements but not costs, even though they won the case for the claimant, but that costs can be claimed for the work done by Barnetts under a Conditional Fee Agreement even if they did not win the case!

 

Change of status of client

 

First I look at CFAs in relation to a change in the status of client’s post-Jackson, that is children attaining majority, those losing capacity, clients dying and clients becoming bankrupt.

 

 

Children attaining majority

 

As long as the minor stays a minor, then there is no problem, and the success fee and base costs are recoverable from the losing party under a pre 1 April Conditional Fee Agreement.

 

The potential problem is in relation to a case where the Conditional Fee Agreement was signed prior to 1 April 2013 and the minor achieved majority on or after that date.  There is the issue of whether costs incurred under the original CFA are recoverable, irrespective of the issue of the success fee, as if the original agreement cannot be assigned, then there is no lawful retainer in place in relation to pre-majority work.  The indemnity principle means no retainer equals no fee.

 

Once the minor achieves his or her majority the role of the Litigation Friend falls away and, on the face of it, so does the Conditional Fee Agreement signed by the Litigation Friend.

 

Two potential consequences flow from this:

 

 

  • that the retainer runs only from the date of the new Conditional Fee Agreement leaving the solicitor with an indemnity principle issue in relation to costs incurred before that date.

 

This penalizes a child for being a child on 31 March 2013. A claimant who was an adult on 31 March 2013, or a child who had achieved his or her majority by that date, would have no such problem.

 

This gives an unwarranted windfall to the tortfeasor.

 

It is strongly arguable that the Legal Aid, Sentencing and Punishment of Offenders Act 2012 is thus not compliant with the Human Rights Act 1998.

 

Section 44 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 was implemented by the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (Commencement No. 5 and Saving Provision) Order 2013. Article 4 contains the saving provisions and it would have been simple to add

 

“(g)        proceedings where a minor whose Litigation Friend entered into a Conditional Fee Agreement before 1 April 2013 achieves his or her majority during those proceedings.”

 

To rub salt in to the wound such a claimant does not get Qualified One Way Costs Shifting as at some stage there had been a Conditional Fee Agreement with a success fee (Landau v The Big Bus Company, 31 October 2014, Master Haworth, SCCO). See my piece – Qualified One Way Costs Shifting.

 

For the same reason it appears that the 10% Simmons v Castle (No 2) [2012] EWCA Civ 1288 general damages uplift does not apply.

 

In cases involving minors achieving their majority the courts are likely to hold that costs, including the recoverable success fee, are recoverable under the original Conditional Fee Agreement and thus no problem is caused by a child being represented under a pre 1 April 2013 CFA attaining majority.

 

In Dunn v Mici [2008] EWHC 90115 (Costs) the Supreme Court Costs Office worked hard to preserve the validity of a CFA on a different point, but with the same potential effect. The court was not dealing with success fee recoverability but that does not affect the rationale of the decision; if the original Conditional Fee Agreement entered in to by the minor is valid, then costs under that original agreement, including the success fee, are recoverable.

 

Dunn v Mici concerned a CFA under the since repealed 2000 Regulations, which imposed heavy regulatory burdens upon solicitors in Conditional Fee cases. The defendant argued that the claimant’s solicitor had failed to comply with those Regulations and so no costs were payable by the claimant and that by operation of the indemnity principle the losing defendant’s liability was nil.

 

As the claimant had been a minor when the Conditional Fee Agreement was entered into, it had been signed by his mother. At paragraph 20 the court said:-

 

“…a principal can act through an agent; here, the principal was Mr Dunn and his mother was his agent. Second, there was no requirement for a litigation friend to be appointed. This would only have been obligatory on the issue of proceedings had Mr Dunn then been a minor, but by that date, he had already attained his majority.”

 

In any case where proceedings had not been issued when the Litigation Friend was appointed then the principles set out in Dunn v Mici apply.

 

If, unusually, proceedings had been issued before the CFA was signed, then there would be a Litigation Friend, who would doubtless have signed the CFA.

 

However, that does not prevent the Litigation Friend from also being the agent of the principal, the principal being the minor.

 


 

Contracts for Necessaries

 

There is a strong argument that a CFA to pursue a lawsuit is a contract for necessaries; such contracts have always been treated differently, and even if made by a person under a legal disability, including a minor, are valid and enforceable.

 

Consequently a minor is free to enter in to a binding and enforceable Conditional Fee Agreement on the basis that it is a contract for necessaries.

 

This is important in relation to the Principal-Agent argument as there must be a valid Principal for there to be a valid Agent.

 

 

In Practice

 

Solicitors should rely on the original CFA and seek recovery of costs, including the success fee, as usual.

 

Additionally the client should sign a statement as follows:-

 

“I confirm that the attached document is a true copy of a Conditional Fee Agreement dated [                     ] entered into between [ solicitor ] and [ name of signatory ] and I confirm that [ name of signatory ]was at all times acting as my lawfully appointed Agent in relation to the Conditional Fee Agreement and had full authority to sign that agreement on my behalf.

 

I have now achieved my legal majority and instruct [solicitor] to continue to act for me under this Conditional Fee Agreement.

 

Insofar as it is necessary for me to ratify this agreement, I hereby do so.”

 

This document does not need to be disclosed to the paying party until and unless the paying party takes the point on assessment of costs.

 

Additionally the client should enter in to a fresh CFA on a “belt and braces” basis but this CFA should not be disclosed to the paying party until and unless the validity of the original agreement is challenged. This does at least give a right to costs from the date of the new agreement if the original one is held to be invalid. In such circumstances the success fee will not be recoverable.

 

In Forde v Birmingham City Council [2009] EWHC 12 (QB) the Queen’s Bench Division of the High Court held that retrospective CFAs are permissible and that no consideration is required. Any changes to the basis of the retainer must be made prior to the entitlement to costs becoming crystallized. The terms of the backdating must be such that a reasonable client would not object, the point being that the actual client is unlikely to object because she will not be paying anything.

 

If the second CFA failed then resort could be had to the first one. The court also held that s 58(1) of the Courts and Legal Services Act 1990 (CLSA 1990) and the changes made thereto meant that even a seriously flawed CFA is not illegal, but merely unenforceable. (See paragraph 206 of the judgment).

 

Thus the client should also sign a retrospective, not backdated, CFA on the same basis as the original one. This CFA should not be disclosed to the paying party until and unless the validity of the original agreement is challenged.

 

There is another, now very significant, problem in relation to children cases where, for any reason, there is no valid pre 1 April 2013 Conditional Fee Agreement; of course the reason may be that the cause of action did not arise until after 31 March 2013.

 

The problem is that most judges are refusing to allow any deduction from a child’s damages in order to fund the claimant solicitor’s success fee. Thus in the event of a post 31 March 2013 Conditional Fee Agreement, or a pre 1 April 2013 Conditional Fee Agreement that is not assigned, the solicitor is likely to get no success fee. As recoverable costs in portal cases are not, on their own, economically viable, it is not now feasible for lawyers to act for children in such cases.

 

This problem will be greatly enhanced if the small claims limit in personal injury cases is raised.

 

With effect from 6 April 2015 the Civil Procedure Rules allow summary, rather than detailed, assessment of costs payable by a child to his or her own solicitors (CPR 46.4(5)). However the procedure is wholly unworkable – see my blog Children’s Cases – April is the Cruellest Month.

 

 

Death and Assignment of Conditional Fee Agreement

 

The same issues apply, that is in relation to the recoverability of the success fee where the original Conditional Fee Agreement was entered into before 1 April 2013, and the client died on or after that date and also in relation to pre-transfer base costs, whenever the original Conditional Fee Agreement was entered into.

 

The issue of base costs has always existed but the whole subject has been brought into the sharper focus by the abolition of the recoverability of the success fee, that is the consequences are potentially more severe.

 

There is no case law on this specific point, that is whether a personal representative can rely on a Conditional Fee Agreement entered in to by the deceased.  In the absence of a Conditional Fee Agreement, there is not normally a problem as work done to the date of death is a debt due from the estate on a quantum merit basis.  That is not the case with Conditional Fee Agreements and as the condition precedent required before payment is due – a win – has not occurred, then on the face of it no payment is due from the estate.

 

If no payment is due from the estate, then the indemnity principle kicks in, no liability = no recovery.

 

Usually solicitors have asked the Personal Representatives to adopt the original Conditional Fee Agreement and to accept, on behalf of the estate, liability for costs incurred up to the date of death.

 

The old Law Society Model Agreement, applying to pre 1 April 2013 Conditional Fee Agreements, said:

 

“(c)         Death

 

This agreement automatically ends if you die before your claim for damages is concluded.  We will be entitled to recover our basic charges up to the date of your death from your estate.

 

If your personal representatives wish to continue you claim for damages, we may offer them a new conditional fee agreement, as long as they agree to pay the success fee on our basic charges from the beginning of the agreement with you”.

 

I have considerable doubts about the enforceability of that paragraph.  As at the time of death the case has not been won and it is strongly arguable that there is no liability for costs.  At the point of death the agreement terminates.  Why is anything due?  Why are such costs recoverable from the other side?

 

It seems to me that if the personal representatives have “a new conditional fee agreement” post 31 March 2013 then the success fee is clearly not recoverable from the other side as it is a “new” post 31 March 2013 agreement.

 

If the estate should be made liable to pay the success fee, then this may be one of those rare cases where a Damages-Based Agreement may be suitable as the 25% charge is not related to the amount of work done, and therefore it does not matter when the agreement is entered into.

 

Clearly if the client dies after 31 March 2013 then a retrospective or backdated new CFA does not help in relation to the recoverability of the success fee, but may help in relation to recovery of base costs since death.

 

I advise that the following agreements be entered into:

 

  1. A backdated deed under seal whereby the Personal Representative, often a widow or widower, adopts the original Conditional Fee Agreement.

 

  1. A fresh Conditional Fee Agreement, without a recoverable success fee.

 

Number 1 is under seal to defeat any argument about lack of consideration as there is no need for consideration in a deed under seal, the point being that on the face of it the estate is not receiving consideration; it could go elsewhere and start again. Arguably the consideration is the agreement of the solicitors familiar with the matter to carry on, but the work already done, for which there is no legal liability to pay, is clearly past consideration and past consideration = no consideration.

 

In Forde v Birmingham City Council [2008] EWHC 90105 (Costs) the Costs Judge held that the agreement of a firm of solicitors to continue to represent a client where there were doubts about the validity of the first Conditional Fee Agreement did amount to consideration for entering into the second Conditional Fee Agreement .

 

This is the preferred option as if found to be enforceable it backdates recovery of basic charges to the beginning and nothing is lost.

 

However if that adoption is held not to be valid, then the second Conditional Fee Agreement comes in to play and at least base costs are recoverable from the date of the second Conditional Fee Agreement.

 

Although the facts of the case meant that there were not in fact different simultaneous agreements in place, the concept of simultaneous Conditional Fee Agreements was recognized by the High Court in Forde v Birmingham City Council [2009] 1 WLR 2732.

 

In that case the High Court held the second of two Conditional Fee Agreements to be valid and enforceable, even though it was retrospective and the retrospective period covered a period prior to 1 November 2005, when there was a very different, much stricter, regime in place.

 

Consequently Conditional Fee Agreements which were defective under the pre 1 November 2005 regime could be “cured” by entering into a new, but retrospective, Conditional Fee Agreement.

 

It is clear beyond doubt that retrospective Conditional Fee Agreements are permissible, see, for example Holmes v Alfred McAlpine Homes (Yorkshire) Ltd [2006] EWHC 110, quoted in Forde.

 

That raises the issue of a retrospective, or backdated, Conditional Fee Agreement taking effect from pre 1 April 2013, so as to seek to preserve recoverability of the success fee. However the Personal Representatives would have no legal existence or standing prior to death, and thus on the assumption that the problem has been caused by a post Jackson death of a person with a pre Jackson Conditional Fee Agreement, this does not help.

 

 

Wills

 

Executors under a Will have immediate power to enter in to a Conditional Fee Agreement on behalf of the estate, but potential administrators have no power until Letters of Administration have been granted by the court.

 

Consequently administrators should enter into the new Conditional Fee Agreement retrospective to the date of death so as to ensure recovery of all base costs since then; realistically executors under a Will, often close relatives of the deceased, are unlikely to get round to dealing with a new Conditional Fee Agreement straightaway and so they too should enter into a Conditional Fee Agreement retrospective to the date of death.

 

Generally, when entering in to a Conditional Fee Agreement solicitors should insist that the client has a will, so as to avoid the potential gap between death and Letters of Administration.  This makes sense in any case, but especially in a serious personal injury case where there is an increased risk of the client dying during the currency of the matter.

 

It is also an excellent opportunity to market the firm’s will-writing service.

 

 

Solicitor Executors

 

If the client appoints as executors partners of the firm of solicitors dealing with the litigation then there is a seamless transfer of power on death to deal with that litigation.

 

 

Death of a Litigation Friend

 

Supposing that a client lacks capacity throughout the claim and the litigation friend dies. Can a pre April 2013 Conditional Fee Agreement between a dead litigation friend be taken over by a new litigation friend or is a new post Legal Aid, Sentencing and Punishment of Offenders Act 2012 Conditional Fee Agreement necessary, with the risk of loss of recovery?

 

My view is that a fresh Conditional Fee Agreement is not necessary. The true party has been the same throughout and the solicitors have been the same throughout and it is clearly a pre-April 2013 Conditional Fee Agreement. The litigation friend is just that and is not a party to the litigation. All that needs to happen is that the new litigation friend be formally advised of their responsibilities, with the Solicitor’s Certificate for suitability etc. being dealt with. The litigation friend is just that – the friend in the litigation and that does not affect the underlying contractual relationship.

 

As a belt and braces policy I advise the adoption of the suggestion I have made above, but also to enter into a fresh Conditional Fee Agreement with the litigation friend but stated to be on the basis that it only comes into play if the original Conditional Fee Agreement is found, for any reason, to be no longer valid. The authority for more than one Conditional Fee Agreement being in place at any given time is Forde v Birmingham City Council [2009] 1 WLR 2732.

 

In my view a court will work very hard to preserve the validity of the original Conditional Fee Agreement, and therefore recoverability of the success fee and indeed pre-death of litigation friend base costs as failure to do so would clearly discriminate against disabled people and is arguably unlawful and a breach of the Human Rights Act 1998. Litigation friends will generally only be necessary where a party is a minor or lacks mental capacity. Both situations involve protected characteristics for the purposes of discrimination legislation and both are afforded protection under the European Convention on Human Rights.

 

In any event a contract between a patient lacking capacity and a solicitor is not void but is voidable and so even if the contract was between the claimant and the patient that would not be fatal to the agreement.

 

That was the rule laid down in Imperial Loan Company Ltd v Stone [1892] 1 QB 599.

 

The paying party has no standing to interfere with that legal position and has no power to argue that the claimant/patient should be required to void the contract.

 

It would be curious indeed if a contract between someone lacking capacity and made pre-April 2013 would be upheld but one where a litigation friend had been properly appointed, but then had died, would not be upheld.

 

In the very recent decision in Blankley v Central Manchester and Manchester Children’s University Hospitals NHS Trust [2015] EWCA Civ 18 the Court of Appeal confirmed that the liability to pay a solicitor’s costs remains with the litigant, even a litigant without capacity, and not with the litigation friend. Thus if the client lacks capacity at the time of retainer, then that retainer is still with the litigant and the litigation friend is merely a statutory agent of the incapacitated litigant, and not a principal to the retainer.

 

This is essentially the same line of reasoning as the court adopted in Dunn v Mici [2008] EWHC 90115 (Costs) in relation to minors.

 

 


 

Bankruptcy of client

 

Section 306 of the Insolvency Act 1986 provides:

 

“(1)        The bankrupt’s estate shall vest in the trustee immediately on his appointment taking effect or, in the case of the official receiver, on his becoming trustee.

 

(2)          Where any property which is, or is to be , comprised in the bankrupt’s estate vests in the trustee (whether under this section or under any other provision of this Part), it shall so vest without any conveyance, assignment or transfer.”

 

Section 283 reads:

 

“(1)        Subject as follows, a bankrupt’s estate for the purposes of any of this Group of Parts comprises –

 

  • all property belonging to or vested in the bankrupt at the commencement of the bankruptcy, and

 

  • any property which by virtue of any of the following provisions of this Part is comprised in that estate or is treated as falling within the preceding paragraph.

 

(2)          Subsection (1) does not apply to:

 

  • such tools, books, vehicles and other items of equipment as are necessary to the bankrupt for use personally by him in his employment, business or vocation;

 

  • such clothing, bedding, furniture, household equipment and provisions as are necessary for satisfying basic domestic needs of the bankrupt and his family”.

 

Section 436 says…

 

“ “property” includes money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property…”.

 

Thus, on the face of it a legal action, being a thing in action, is property and vests in the trustee.  However that is not the whole story as the courts have consistently held that certain actions, including personal injury general damages only actions, do not vest in the trustee.

 

In Heath v Tang [1993] 3 All ER 694 the Court of Appeal said:

 

“The property which vests in the trustee includes “things in action”: see s.436 of the 1986 Act.  Despite the breadth of this definition, there are certain causes of action personal to the bankrupt which do not vest in his trustee.  These include cases which –

 

“the damages are to be estimated  by immediate reference to pain felt by the bankrupt in respect of his body, mind, or character, and without immediate reference to his rights of property.”  (See Beckham v Drake [1849] 2 HL Cas S79 at 604, 9 ER 1214 at 122 per Erle J.  See also Wilson v United Counties Bank Ltd [1920] Ac 102, [1918-19] All ER Reg 1035).

 

“Actions for defamation and assault are obvious examples.  The bankruptcy does not affect his ability to litigate such claims.  But all other causes of action which were vested in the bankrupt at the commencement of the bankruptcy, whether for liquidated sums or unliquidated damages, vest in his trustee.  The bankrupt cannot commence any proceedings based upon such a cause of action and, if the proceedings have already been commenced, he ceases to have sufficient interest to continue them.  Under the old system of pleadings, the defendant was entitled to plead the plaintiff’s supervening bankruptcy as a plea in abatement.  Since the Supreme Court of Judicature Act 1875, the cause of action does not abate but the action will be stayed or dismissed unless the trustee is willing to be substituted as plaintiff: see

 

Jackson v North Eastern Railway Co (1877) LR 5 Ch D 844.

 

In  Ord v Upton [2000] 1 All ER 193

 

the Court of Appeal quoted that passage and said:

 

“Section 436 is not in truth a definition of the word “property”. It only sets out what is included. As will appear later from the cases that have been decided over many years, actions which relate to a bankrupt’s personal reputation or body have not been considered to be property and therefore they do not vest in anybody other than the bankrupt. They relate solely to his body, mind and character and any damages recovered are compensation for damage to his body, mind and character as opposed to other causes of action which have been considered to be a right of property. Thus causes of action to recover damages for pain and suffering have been held not to vest in the trustee. That has led to a number of oddities. For example, the parties agree that if at the time of the bankruptcy, the bankrupt had in his bank a sum which included money paid as damages for a libel, that sum would vest in his trustee because the right to the money formed part of his estate and therefore was available to pay off the bankrupt’s creditors. That was to be contrasted with an action personal to the bankrupt, such as a libel action, which was not settled before the end of the bankruptcy. In such circumstances the cause of action would remain with the bankrupt as would any damages awarded after discharge. If a cause of action is not personal to the bankrupt, it vests in the trustee and therefore any damages awarded whether before or after the discharge will be available to discharge the bankrupt’s liabilities.”

 

In Ord the claim was a negligence action for personal injury, including special damages, and the issue was whether the existence of the special damages claim took the case out of the exception, meaning that it vested in the trustee, or remained wholly within the exception, or could be severed so that the general damages claim remained with the bankrupt but the special damages claim vested in the trustee.

 

The Court of Appeal held that that was a single, indivisible action and therefore it either all remained with the bankrupt or all vested in the trustee, and that it was a hybrid claim, in part personal in part relating to property.

 

The Court of Appeal held that the action vested in the trustee and to fall within the exception a claim must relate only to a cause of action personal to the bankrupt, adding “All causes of action which seek to recover property vest in the trustee whether or not they contain other heads of damage to which the bankrupt is entitled.”

 

In Beckham v Drake (1849) 11 HLC 1213 the Court of Exchequer Chamber repeatedly used the term “assignees” in relation to the passing of the action to the trustee, and the terms was also used in Stanton v Collier (1854) 23 LJQB 116  and subsequent cases.

 

In Ord the Court of Appeal undertook an extensive review of the authorities and concluded that although the whole of the action vested in the trustee the actual general damages belonged to the bankrupt and did not form part of the trustee’s fund, and thus the damages must be split between the trustee and the bankrupt.

 

Thus if the claim is for general damages only then the claim does not vest in the trustee at all and thus the original Conditional Fee Agreement continues in place and the base costs, together with a recoverable success fee in a pre 1 April 2013, can be recovered in the usual way.

 

If the claim includes any element of special damages then the whole claim passes to the trustee, although any general damages recovered will belong to the bankrupt.

 

If the claim passes to the trustee then the issue arises as to the validity of the original Conditional Fee Agreement, that is can it be validly assigned?

 

As set out above the courts frequently referred to the trustee as being an assignee of the action, which lends support to the idea of the Conditional Fee Agreement being assignable.

 

Clearly if the special damages form only a small part of the claim a policy decision needs to be made as to whether to jettison that part of the claim, leaving a general damages claim only which undoubtedly remains with the bankrupt personally and thus no issue arises as to the validity of the original CFA.

 

If that is not an option, then the Trustee should be strongly advised to have the original CFA assigned to him or her.

 

There is no authority in relation to assigning the Conditional Fee Agreement in such cases. However it seems to me that if the chose in action can be assigned, then the retainer, which is inevitably parasitic upon the chose, must also be capable of assignment.

 

It will virtually always be in the interests of the creditors for this to happen as it represents the best opportunity of maximising the recovery of assets and if the success fee remains recoverable from the other side, rather than being payable out of damages, then that represents significant extra assets for the creditors.

 

Section 304(1) of the Insolvency Act 1986 reads as follows:-

 

“(1)        Where on an application under this section the court is satisfied—

 

  • that the trustee of a bankrupt’s estate has misapplied or retained, or become accountable for, any money or other property comprised in the bankrupt’s estate, or

 

  • that a bankrupt’s estate has suffered any loss in consequence of any misfeasance or breach of fiduciary or other duty by a trustee of the estate in the carrying out of his functions,

 

the court may order the trustee, for the benefit of the estate, to repay, restore or account for money or other property (together with interest at such rate as the court thinks just)or, as the case may require, to pay such sum by way of compensation in respect of the misfeasance or breach of fiduciary or other duty as the court thinks just.”

 

It is arguable that a failure by the Trustee to agree to the assignment of a Conditional Fee Agreement, especially a pre 1 April 2013 one, could result in a liability under section 304(1)(b).

 

 

Change of firm

 

Neither the Courts and Legal Services Act 1990, as heavily amended, nor the plethora of regulations, orders and statutory instruments dealing with Conditional Fee Agreements address the issue of assignment and thus the starting point is that common law principles apply.

 

The common law position is that the benefit of contract, but not the burden, can be assigned and therefore generally a Conditional Fee Agreement cannot be lawfully assigned to the new firm and thus the client must enter in to a new agreement with the new firm and thus forego the recoverable success fee.  For reasons I will deal with below that does not necessarily mean that recovery of the pre-transfer base costs is lost.

 

I must admit to struggling with the benefit/burden issue as all contracts must involve both, otherwise there is no consideration and no consideration equals no contract, unless it is a deed under seal.  Clearly from the client’s point of view the benefit is having the work done and the burden is paying the fee, but in reality the whole point of seeking to assign the agreement in these cases is to avoid the client paying any fee at all.  Thus from the client’s perspective what burden is assigned?  Of course in the Alice in Wonderland world of costs the indemnity principle means that the client has to have an entirely illusory liability to pay costs but it is entirely illusory and it is hard to see why a court applying common law principles should take any notice of illusions.

 

There is a further problem in that at common law there can be no assignment of a contract that is personal in nature, and a contract for the provision of legal advice is a classic example of such a contract.  Again one wonders how that proposition squares with the reality of a claims world in which many firms never see their client and where clients and cases are traded as mere commodities with the client meaning no more to his lawyer than a sack of corn.

 

Here I deal with possible practical ways round the Conditional Fee Agreement problem when it is the firm and not the client which changes.

 

There are at least five potential scenarios when the issue of assignment can arise:-

 

  1. that the client’s solicitor moves firm and that client wants to instruct that solicitor as he or she has trust and confidence in that solicitor;

 

  1. that the client loses trust and confidence in the existing solicitor and wishes to move to a new firm;

 

  1. that neither of the above applies but that the client moves firms of his or her own volition;

 

  1. the firm abandons that type of work and/or sells its caseload of that type of work to another firm.

 

  1. none of the above applies but the original firm ceases to exist through insolvency, lack of professional indemnity insurance, merger or any other reason;

 


 

Scenario 1

 

The client’s solicitor moves firm and that client wants to instruct that solicitor as he or she has trust and confidence in that solicitor

 

There is but one case on the subject and that is clearly not on all fours with the subject matter of this piece.

 

In Jenkins v Young Brothers Transport Limited [2006] EWHC 151 [QB]

 

the Queen’s Bench Division of the High Court found an exception to the general law against assignment in a case involving a Conditional Fee Agreement.

 

In Jenkins the solicitor dealing with Mrs Jenkins’ matter moved from one firm of solicitors to another and then to a third firm and on each occasion the Conditional Fee Agreement was assigned, creating two assignments and with three firms in all acting at some stage under the CFA.

 

The High Court held that where the events underlying the assignment were the trust and confidence that the client had in her solicitor the Conditional Fee Agreement could be assigned by one firm of solicitors to another.

 

The court worked hard to reach this conclusion, partly because any other decision would have given a windfall to the insurer and the courts do not like windfalls.  Not all of us are convinced of the correctness of this decision and indeed at paragraph 28 the High Court itself said that the facts in this case were singular and that it had not derived assistance from the authorities on the law of assignment.

 

Neither have I.

 

A key part of the court’s reasoning was that the relationship between client and solicitor involves personal confidence and that here that solicitor had moved firms and thus by allowing assignment the court was preserving, not breaking, that personal relationship for personal services.

 

This is scenario 1 above and my view is that a court looking at similar facts now would reach the same conclusion.

 

If the old firm merges with another law firm or is sold to another law firm and the actual solicitor who has conduct of the case works for the new entity and thus continues to deal with the matter, then the situation is no different from Jenkins v Young Brothers Transport Limited, and there should be no problem in assigning the original Conditional Fee Agreement.

 

 


 

Scenario 2

 

The client loses trust and confidence in the existing solicitor and wishes to move to a new firm

 

Scenario 2 involves trust and confidence, but the loss of it rather than the existence of it, by a client who is moving firms.

 

If this situation does not exist, that is that it will not be the same solicitor dealing with the matter, but the original firm no longer exists, then the client has no option but to move firm. There is no case law on this point in relation to conditional fee agreements.

 

If a firm falls into financial difficulties then clearly it is reasonable for the client to lose trust and confidence in that firm and it may well be that a court will arrive at the same conclusion as the High Court here, namely that it is sufficient to take the case out of the general rule against assignment.

 

However in the third scenario, where it is simply that the client wishes to move without having lost trust and confidence in their existing solicitor (Scenario 2) or without the client’s solicitor moving firm (Scenario 1), then I believe that the court is much less likely to find that there is a lawful assignment.

 

Scenarios 2 and 3 fall in between although if there is no inherent problem with the first firm (scenario 3) a client would be singularly badly advised to transfer firms from a position where the client has a recoverable success fee under a pre-1 April 2013 conditional fee agreement to a position whereby s/he has a post 31 March 2013 conditional fee agreement with a non-recoverable success fee.

 

Scenario 2, where the client loses trust and confidence in the existing solicitor, and thus wishes to move to a new firm, is difficult.  On balance my view is that a court would decline to hold that there is an assignment in such a case.

 

Scenario 4

 

Where the firm abandons that type of work and/or sells its caseload of that type of work to another firm

 

Scenario 4 can involve an overlap with Scenarios 1 or 2 as set out above.

 

Here I am assuming that the solicitor dealing with the matter has not moved firms and that the client has not lost trust and confidence in his or her existing solicitor at the existing firm but rather that the solicitor’s choice of firm has ceased to exist without the solicitor having conduct of the case going to the new entity.

 

My advice is that in such a situation the parties should:-

 

  1. Sign up to a new post 1 April 2013 Conditional Fee Agreement;

 

  1. Also have a Deed of Assignment entered into by the firm of solicitors and the client and assigning the original Conditional Fee Agreement to the new solicitor.

 

I cannot say with any confidence that the original Conditional Fee Agreement will be held to have been successfully assigned and therefore I cannot say that recoverability of the success fee from the other side will be achieved.

 

Defendants are likely to refuse to pay the success fee and indeed the pre-transfer costs in such circumstances as the lawfulness or otherwise of the assignment is potentially worth tens of millions of pounds to the insurance industry.

 

Furthermore the issue of whether this is a device to avoid the ban on referral fees is bound to be raised.

 

In the other scenarios there is a very significant risk that the courts will not hold an attempt to assign the Conditional Fee Agreement to be valid.

 

It is strongly arguable that the trading of cases and clients as commodities is the antithesis of any concept of preserving any form of personal relationship for personal services.  That is scenario 4.

 

In summary where there is any post 31 March 2013 change in the status of the solicitor acting under a conditional fee agreement there is a strong chance that the validity of the original retainer and its assignment will be challenged and that challenge may well be successful unless the Jenkins principle applies.

 

Scenarios 2 to 4 clearly fall outside Jenkins but in each case the original firm continues to exist and that provides a solution.

 

 

Solicitor’s costs for a period when the solicitor was not authorised to practice

 

In Jarrett v Tesco Store Ltd, Cambridge County Court 23 February 2015

 

the court found that the assignment of a Conditional Fee Agreement was ineffective in circumstances where it was originally assigned in February 2012 after the original firm of solicitors had closed and one of the partners decided to carry on in practice on his own but had not been authorised to do so under Rule 10.1 of the Solicitors Regulation Authority Practice Framework Rules 2011. The partner then joined another law firm and again the CFA was signed to that firm.

 

Here the court recognised that Jenkins v Young Brothers Transport Ltd [2006] EWHC 151 (QB) was authority for the proposition that there can be an assignment of a CFA from one firm to another. In that case the client followed the solicitor from one firm to another as he had trust and confidence in his skills and expertise.

 

However that did not extend to the unusual circumstances here where the client was seeking to recover solicitor’s costs for a period when the solicitor was not authorised to practice at all. The client’s trust and confidence could not properly repose in a solicitor whose Professional Practice Rules prevented him from acting as a solicitor at the relevant time.

 

Comment: The facts of this case are unusual and will not crop up very often.

 

 


 

Agency

 

As the old firm continues to exist then it can instruct the new firm on an agency basis as this preserves the original Conditional Fee Agreement and once the case is won then the client is liable to pay the original firm from the beginning under a pre 1 April 2013 Conditional Fee Agreement. Thus the success fee is recoverable, as well as all of the basic charges from the beginning. In other words the recovery is as though there had not been a change of solicitor.

 

Agency arrangements have a long history, with the concept of London Agents to deal with matters involving the courts in the capital very well established. Thus this model should be safe from attack, apart from the relatively minor issue of whether there was any duplication of work due to the agent having to re-read the papers. However this will only lead to a minor reduction in costs; it does not threaten the whole basis of the agreement.  It is simply a solicitor and own client costs or between the parties costs issue.

 

In such circumstances there is no need to serve Notice of Change.

 

If the old firm has sold its work to the new firm then it is likely that the two firms can agree to an agency arrangement.  The client may be less happy and clearly a firm that simply abandons the client and the work part way through a conditional fee agreement is not entitled to any costs at all if the client chooses to instruct a completely different firm, that is not the new firm to whom the work has been sold.  Any issue of breach of contract does not need to be considered – this is good old doctrine of frustration territory.

 

Note too that such an arrangement between the selling firm and the buying firm helps avoid the very real risk that, where a personal injury workload is sold to a new firm which goes on the record, there is an unlawful referral fee, that is the original firm referring, for a fee, the cases to the new firm.

 

If the client moves because she or he is unhappy with the old firm, then the client may not be happy about the old firm remaining on the record and involved.  That unhappiness is likely to disappear when the client understands that such an arrangement will mean that all of the damages are kept, rather than being subject to a 25% deduction in a post 31 March 2013 conditional fee agreement.

 

Likewise the client who moves for no good reason.  There it may be the sacked solicitor who is unhappy about staying involved, but in practice that solicitor has a much greater chance of recovering costs if its own original conditional fee agreement is relied upon, together with an otherwise unrecoverable success fee.

 

Scenario 5

 

Where the original firm ceases to exist through insolvency, lack of professional indemnity insurance, merger or any other reason

 

Scenario 5 is the most difficult one. If the firm is in administration then the firm continues to exist and the above arrangement works, with the new firm being the agent of the administrators, but it is a risky arrangement which jeopardises the incoming firm’s right to any fees at all.

 

In such a case the new firm should enter in to a new conditional fee agreement with the client so as to guarantee its own costs, albeit that no success fee will be recoverable from the other side.  That in turn means that no notice in Form N251 needs to be served as in a post 31 March 2013 conditional fee agreement the other party has no more right to be informed of the nature of the retainer than if it is an old-fashioned hourly rate one.

 

It is a matter for the firm as to whether it wishes to charge the client a success fee under the new agreement.  It is entitled to do so but it means that the client is losing out through no fault of their own.

 

The new firm should also enter into a deed of assignment with the administrators and the client, assigning the original conditional fee agreement, although for reasons set out above I have my doubts as to whether that works.

 

If possible the old firm should be kept going for the sole purpose of concluding cases with an existing conditional fee agreement and/or recoverable after-the-event insurance policy.  It is a matter between the firms as to how any recovered costs are distributed; the key is to maintain the right to recover all costs.

 

If this is not possible then consider having the old firm as a temporary trading name of part of the new/merged firm for the purposes of conducting the relevant cases.  A change of ownership of the firm does not, of itself, affect entitlement to costs.  If it were otherwise then every time a partner retired or a new partner entered the partnership, all previous work under a conditional fee agreement would be irrecoverable.

 

The same applies to a situation where the old firm still exists, but for whatever reason one party is not prepared to enter into an agency arrangement.

 

 

Quantum Meruit

 

In Forde v Birmingham City Council [2009] EWHC 12 (QB), the Queen’s Bench Division held that it is contrary to public policy to allow costs on a quantum meruit basis in relation to work done under an unenforceable conditional fee agreement. Such a claim would be available in every case of non-compliance and this would render the statutory prohibition on enforcement illusory.

 

There is no unjust enrichment of the client in such a case. The court, as a matter of justice, should not impose upon a client an obligation to pay in circumstances where Parliament has provided that the agreement under which he agreed to pay the costs should not be enforceable against him. (paragraph 206 of the judgment).

 

The agreement to continue to act in the case under the second Conditional Fee Agreement was adequate consideration. No presumption of under influence arose in such circumstances. The second Conditional Fee Agreement could be retrospective even though that retrospective period covered a period before 1 November 2005, that is a period under the old, much stricter, regime. Consequently, Conditional Fee Agreements which were defective under the 1 November 2005 regime could be ‘cured’ by entering in to a new, but retrospective, Conditional Fee Agreement.

 

Here, ultimately, no success fee was sought but the court held, obiter in the circumstances, that if a retrospective success fee was sought and was held to be contrary to public policy then that would not vitiate the second Conditional Fee Agreement as a whole. The court, obiter, held that a retrospective success fee is not contrary to public policy.

 

In an old-fashioned hourly rate retainer there is an obligation to pay, whatever the outcome of the case and whatever stage has been reached. The result is immaterial. On transfer of the case the former solicitor is entitled to be paid in full, and thus no problem arises with the indemnity principle. Indeed all solicitors are familiar with this scenario and with the concept of the solicitor receiving the case undertaking to preserve the original firm’s lien for costs, which are then recovered by the new solicitor from the other side if the case is won and paid to the former solicitor, with the client always remaining liable for those costs.

 

As we have seen, that is not the case in relation to a Conditional Fee Agreement.

 

The potential outcome is this:-

 

  • the original firm has not created a liability to be paid as the case has not been won and the doctrine of quantum meruit does not apply;

 

  • the new firm has no right to pre-transfer costs and thus is only entitled to costs from the date of instruction by the client and hence the need for a new Conditional Fee Agreement;

 

 


 

Backdating and Retrospective Conditional Fee Agreements and Rectification

 

A backdated Conditional Fee Agreement is just that, for example an agreement entered into on, say, 1 August 2013 but dated 31 March 2013. A retrospective Conditional Fee Agreement is one entered into on, say, 1 August 2013 and dated 1 August 2013 but expressed to cover work for a period prior to that date, say 31 March 2013. The effect may appear to be the same, namely that all work from 31 March 2013 is covered, but the courts have not always treated them the same way, and there is a clear judicial preference for retrospective, rather than backdated, Conditional Fee Agreements.

 

In Motto v Trafigura Ltd [2011] EWCA Civ 1150, the Court of Appeal held that the costs of vetting cases were only recoverable if covered by the Conditional Fee Agreement as otherwise there was no retainer, but the Conditional Fee Agreement could be drafted in such a way as to encompass the period when the vetting work was done, even if that was prior to the date of the Conditional Fee Agreement. At paragraph 61 of the judgment the court said:

 

“Equally, although of course solicitors and their clients can agree terms otherwise (as in the case of conditional fee agreements 3, 5, 6 and 7) the natural presumption in a contract by which a person engages a solicitor to act for him must be, in the absence of such a term, that he is agreeing to pay for work done in the future, not for work already done.”

 

Thus it is not even necessary to backdate the Conditional Fee Agreement; all that is needed is for a Conditional Fee Agreement entered in to at any time to recite that it covers work already done. Here the court appears not to have considered the old legal maxim that ‘past consideration is no consideration’ but that problem can be avoided by the conditional fee agreement being a deed under seal, in which case no consideration is required.

 

#FootnoteB

 

#FootnoteE

Retrospective conditional fee agreements

 

In Forde v Birmingham City Council [2009] EWHC 12 (QB), the Queen’s Bench Division of the High Court held that retrospective Conditional Fee Agreements are permissible and that no consideration is required. Any changes to the basis of the retainer must be made prior to the entitlement to costs becoming crystallized. The terms of the backdating must be such that a reasonable client would not object, the point being that the actual client is unlikely to object because she will not be paying anything.

 

If the second Conditional Fee Agreement failed then the first one could be resorted to. The court also held that s 58(1) of the Courts and Legal Services Act 1990 (CLSA 1990) and the changes made thereto meant that even a seriously flawed conditional fee agreement is not illegal, but merely unenforceable (See paragraph 206 of the judgment).

#FootnoteB

#FootnoteE

 

In Ahmed v The Bread Roll Co Ltd [2009] EWHC 90141 (Costs), the Senior Courts Costs Office held that although a backdated Conditional Fee Agreement was valid it was best to date it correctly, that is as at the date of signing and make it retrospective so as to avoid any suspicion of misleading anyone. An appeal against this decision was settled on terms not disclosed to the court.

#FootnoteB

#FootnoteE

 

In King v Telegraph Group Ltd [2005] EWHC 90015 (Costs) Senior Costs Judge Master Hurst held that a conditional fee agreement could be retrospective and said that “there seems no doubt therefore that the claimant is entitled to recover base costs from the date when he instructed his solicitors until the signing of the conditional fee agreement.”

 

However he added:

 

‘“Although there is no prohibition in the legislation against backdating a success fee, such backdating seems to me to fly in the face of the CFA Regulations and the CPR”, pointing out that the solicitors do not assume any risk under the CFA until it is signed and that they are under no duty to serve Notice of Funding until it is signed.

 

“It seems to me therefore to be quite wrong, and contrary to public policy, to permit the claimant’s solicitors to recover a success fee prior to the signing of the CFA.”’

 

In Holmes v Alfred McAlpine Homes (Yorkshire) Ltd [2006] EWHC 110 (QB), the Queen’s Bench Division of the High Court held that where solicitors had failed to explain to a client that a conditional fee agreement had been backdated, the agreement was still enforceable as there had been no material effect on the protection afforded to the client nor on the administration of justice.

 

The client had understood that the agreement did not apply to work undertaken before it was signed, and there had been no allegation of impropriety on the solicitor’s part.

#FootnoteB

#FootnoteE

 

In The Commissioners for Her Majesty’s Revenue and Customs v Blue Sphere Global Limited [2011] EWHC 90217, the High Court upheld the principle of retrospective conditional fee agreements, and success fees, and followed the case of Forde v Birmingham City Council [2009] EWHC 12 (QB) allowing the recovery of the success fee for the retrospective period.

 

This was a VAT tribunal case where there was no formal requirement to serve a Notice of Funding on Form N251. The court also held that the lack of notice made no difference as the paying party would have conducted the proceedings in exactly the same way even if it had had notice.

 

In J M Dairies Limited v Johal Dairies Limited and another [2011] EWHC 90211 (Costs), Master Gordon-Saker accepted that retrospective conditional fee agreements were not contrary to public policy and were lawful, but held that on the facts it would be unreasonable to require the defendants to pay the large retrospective success fee, including £60,000 for work done before the conditional fee agreement had been entered into, in the absence of notice of the conditional fee agreement during that retrospective period.

 

He observed that there was significant judicial reluctance to allow recovery of retrospective success fees for the retrospective period, but allowed base costs for the retrospective period and both base costs and success fees thereafter.

 

It is clear that some commentators have misunderstood the rationale of Motto v Trafigura Ltd [2011] EWCA Civ 1150, where the Court of Appeal’s comments were not addressed to the lawfulness of retrospective success fees, but rather the separate issue of whether funding investigation costs are recoverable. There the Court of Appeal was not referred to Forde, and it is widely accepted that its statement that “Until the conditional fee agreement is signed, the potential claimant is not merely not a claimant: he is not a client” is very obviously wrong.

 

So retrospective conditional fee agreements are lawful but recovery of success fees in the retrospective period will depend upon the facts of each case, including whether there has been compliance with the CPR and the effect on the paying party of the retrospection, the point being that, generally, by definition, the Form N251 will also be retrospective.

 

It remains to be seen whether the courts will adopt the same attitude in relation to conditional fee agreements entered in to on or after 1 April 2013 when any success fee will be recoverable only from one’s own client, that is the person actually entering in to the Conditional Fee Agreement whether it be backdated, retrospective or rectified.

#FootnoteB

#FootnoteE

 

In Hawksford Trustees Jersey Ltd v Stella Global UK Ltd and another [2012] EWCA Civ 987, CA, the main issue concerned a claimant who had been unable to obtain ATE cover prior to the original trial. He was successful at trial and the defendant appealed. At this stage the claimant managed to obtain ATE cover that not only provided cover in relation to the costs of the appeal, but would also provide cover in relation to the costs of the original proceedings if the appeal succeeded. The court was concerned with the issue of whether that element of premium attributable to providing cover for the original proceedings was recoverable as costs of the appeal and held that it was not.

 

Of rather wider significance was part of the reasoning why the majority of the court concluded that it would be wrong to allow for such recovery. The importance of giving notice of funding to an opponent was highlighted. In the judgment of Lord Justice Rix:

 

“… the importance of fair notice being given to the other party of a potential liability in additional costs is entirely undermined if the premium which the respondent seeks to recover in the appeal, so far as it relates to costs of trial, could be recoverable. For the defendant would have incurred all the costs of trial together with its potential (but retrospective) liability for the respondent’s ATE premium in ignorance, necessarily so, of what was coming round the corner when it appealed. When, however, in the course of its appeal, it learns for the first time of the ATE premium taken out in the appeal embracing cover for the costs of trial, it is too late for the defendant to do anything. It cannot concede the claim – it has already fought the trial. And if it concedes the appeal, then, if the respondent is correct in its interpretation of section 29, it will have to pay the ATE premium for the costs of trial. This is despite the fact that, in obtaining an appeal, it has persuaded the trial judge or the Court of Appeal that permission to appeal should appropriately be granted to it (while there is no similar hurdle in the standard case of a domestic claim form). In my judgment, such a situation is both unfair and antithetical to the purposes of the section. Moreover, although the matter was not debated before us, it is not clear to me that such unfairness can be dealt with as a matter of the question which arises before the costs judge of “whether the cost of insurance cover is reasonable” as a matter of quantum: see CPR 44 PD 11.10. The present issue is rather a matter of principle and jurisdiction.”

 

It appears that exactly the same reasoning could be used to decline to allow recovery of a retrospective success fee.

#FootnoteB

#FootnoteE

 

By virtue of the Legal Aid, Sentencing and Punishment of Offenders Act 2012, recoverability of the success fee in a conditional fee case has been abolished in relation to conditional fee agreements entered in to on or after 1 April 2013. Thus the precise date of the agreement will determine who pays the success fee.

 

Clearly an agreement dated post 1 April 2013 but retrospective will not avoid the provisions of the Act and the courts have found against rectification – see Oyston v Royal Bank of Scotland [2006] EWHC 90053 (Costs) below. However, it is arguable that an agreement actually entered in to on or after 1 April 2013 but backdated is not caught by the Act as although the courts clearly prefer retrospective conditional fee agreements they have not gone as far as actually to prohibit backdated conditional fee agreements.

 

In Forde v Birmingham City Council [2009] EWHC 12 (QB) the High Court held the second of two conditional fee agreements to be valid and enforceable, even though it was retrospective and the retrospective period covered a period prior to 1 November 2005, when there was a very different, much stricter, regime in place. Consequently conditional fee agreements which were defective under the pre-1 November 2005 regime could be ‘cured’ by entering in to a new, but retrospective, conditional fee agreement.

 

The same logic could be applied in relation to conditional fee agreements entered into post 1 April 2013, but backdated to bring them within the pre-Legal Aid, Sentencing and Punishment of Offenders Act 2012 regime.

 

However, in such circumstances a court would almost certainly exercise its discretion to disallow recoverability both because the notice to the paying party will have retrospective effect, although not backdated, and also so as to give effect to the clear will of Parliament; as we have seen even where a backdated conditional fee agreement is valid the courts have been very reluctant to allow recoverability from the period prior to the actual date of signing.

#FootnoteB

#FootnoteE

 

 

Unlawful agreement – attempt to rectify by severance

 

In Oyston v Royal Bank of Scotland [2006] EWHC 90053 (Costs), the claimant had entered into a conditional fee agreement with his solicitors that provided for a 100% success fee and payment of a bonus in the event that damages in excess of a certain amount were recovered.

 

This was clearly an illegal agreement and the parties subsequently entered into a deed of variation that removed the reference to the bonus payment but the defendant argued that the conditional fee agreement was invalid as it was in breach of s 58(4) of the Courts and Legal Services Act 1990.

 

The claimant argued that the original agreement had been rectified by a consensual deed of variation and that it was possible to vary the agreement retrospectively, and that the departure from the statutory requirement had not had a materially adverse effect on the protection afforded to the client as the condition for triggering the bonus fee had not been met and that the use of severance was possible as the amount of the bonus element would not change the contract.

 

The court held that the Conditional Fee Agreement was in clear breach of s 58(4) and that the deed of variation was ineffective to rectify the situation as against the paying party. It had only been entered into when it was realised that the original agreement had a potentially fatal defect and it could not be right that a deed of variation could be used to impose a greater burden on the paying party than existed before judgment (see Kellar v Williams [2004] UKPC 30).

 

The fact that the claimant agreed to the variation was irrelevant. A breach of s 58(4)(b) and (c) would inevitably have a materially adverse effect upon the administration of justice and therefore the claimant’s argument on materiality failed (see Jones v Caradon Catric Ltd [2005] EWCA Civ 1821).

 

Severance was not available as it would be contrary to public policy to permit it; otherwise all defective agreement could be put right late in the day, even after the paying party had pointed out the alleged defects. That would not accord with either the statutory framework approach to public policy.

 

The conditional fee agreement was unlawful and unenforceable (see Spencer v London Wood (2004) Times, 30 March and Awwad v Geraghty & Co [2001] QB 570).

 

It seems from the case law set out above that had the parties entered in to a new, retrospective, conditional fee agreement it would have been valid and enforceable, albeit that the success fee may not have been recoverable from the paying party.

 

 

Pre-Assignment Base Costs

 

If there has been no valid assignment and the new firm has to rely on a new conditional fee agreement one of the key issues is whether it is all or nothing, that is whether in a non-assignable conditional fee agreement nothing is recoverable, either the success fee or the pre-transfer base costs.

 

Could the courts logically allow pre-transfer base costs but no success fee, bearing in mind that courts do not like windfalls, here the windfall to the losing tortfeasor being off the hook for pre-transfer base costs as well as the success fee?

 

If the new post-transfer conditional fee agreement is retrospective to the date of the original agreement then the answer may be that the court could so find.  Retrospection in contracts has always been allowed and was specifically sanctioned in conditional fee cases by the Court of Appeal in Forde v Birmingham City Council [2009] EWHC 12 (QB) which case also sanctioned concurrent CFAs.  This allows firms to seek to rely on the original, assigned, agreement but in default to rely on the new retrospective agreement.

 

If the new agreement needs to be relied upon, then it is very unlikely that the recoverability of the success fee will be allowed.  Even assuming – which is highly doubtful – that a CFA retrospective to pre-1 April 2013 could lawfully provide for a success fee, the courts have always been unwilling to allow recoverability prior to notice being given on Form N251.

 

This is because the idea of such notice being served was that the potential paying party might change its behaviour, for example by increasing an offer to settle.  A party that is unaware of a potential additional liability cannot do that and obviously notice, as a matter of logic, cannot be given retrospectively.

 

However the disallowance of a recoverable success fee does not prevent a court from allowing recoverability of normal between the parties costs on a standard basis from the date that the CFA is stated to begin.

 

Thus in a post-31 March 2013 CFA there is nothing inherently wrong in a court allowing ordinary costs back to the beginning of the case but disallowing any success fee.

 

Where there has been a change in the nature of the client, rather than a change in the status of the firm, this presents no difficulty, although as discussed above it is in those cases that the court is most likely to find a solution which allows recovery of the base costs and the success fee.

 

If the firm has changed then can the new firm have a retrospective CFA that picks up a previous firm’s costs?  By agreement with the client there is no reason why not.  Note that past consideration is no consideration and no consideration equals no contract unless the contract is a deed under seal.  It is arguable that a retrospective agreement does not involve past consideration; that is the whole point of retrospectivity, but it is best not to take any chances, so make the retrospective CFA a deed under seal.

 

A new firm taking over an issued matter maybe one of the few instances warranting a Damages-Based Agreement as this allows the new firm to charge a flat 25% of damages to the client however little work the new firm does.  A client may see it differently and prefer to pay by the hour in such circumstances.

 

That raises the issue of recoverability.  There is no requirement to claim costs from the other side on the old basis of hours X appropriate level of fee-earner.  In principle there is no reason why the costs claimed should not be a straight 25%, irrespective of the work done, which would fully protect the client.  How a court assessing such a costs claim will react is as yet unknown.  It is true that a DBA is a mixture of a fee for work done and a fee for taking the risk.  In a CFA those matters are, and have always been, separated out with the base costs being the fee for work done and the success fee being the risk fee.  Consequently it could be argued that recoverability of the full DBA would amount to the recovery of a success fee but the CPR make the indemnity rule apply in full to DBAs, suggesting that that is what is intended.

 

 

Qualified One Way Costs Shifting

 

Qualified One Way Costs Shifting is dealt with very shortly in the Civil Procedure (Amendment) Rules 2013 at new CPR 44.13 to 44.17.

 

 

Exceptions

 

Pre-action disclosure applications are not protected by QOCS, nor are proceedings where a claimant has entered into a pre-commencement funding arrangement before 1 April 2013.

 

Put simply if, prior to 1 April 2013, there is in place a conditional fee agreement or collective conditional fee agreement or ATE or membership organisation indemnity, then QOCS protection will not apply.

 

I can understand why, if ATE insurance or membership organisation protection is in place, QOCS should not apply as it would be unfair for a defendant to pay the recoverable ATE premium to a clamant who, on the face of it, is at no risk of paying costs.

 

However the success fee is to reward the lawyer for taking the chance of getting no fee because the case is lost. What on earth has that got to do with the risk of the defendant’s costs being payable?

 

This thinking is as woolly as a mammoth.

 

A pre-commencement funding arrangement is a creature “as defined in rule 48.2” (new CPR44.17). So, naturally, one looks at new CPR48.2, where at CPR 48.2(1)(a)(i) one will find the following:

“48.2(1) A pre-commencement funding arrangement is-

………..

  • a funding arrangement as defined by rule 43.2(1)(k)(i) where……”

 

CPR 43.2(1)(k)(i) defines a funding arrangement as “an arrangement where a person has –

  • entered into a conditional fee agreement or a collective conditional fee agreement which provides for a success fee…..”

 

A first day trainee can do better than that.

 

So QOCS applies to all personal injury proceedings where there is no pre-1 April 2013 recoverable success fee or ATE or membership organisation premium in place.

 

 

Retrospection of QOCS 

 

Thus it is fully retrospective in all other cases, covering cases that have been going on for years, which may come as a shock to insurers. This has recently been confirmed by the Court of Appeal in Wagenaar v Weekend Travel Ltd t/a Ski Weekend and Serradj (Third Party) [2014] EWCA Civ 1105, 31 July 2014.

 

The transitional provision is new CPR 44.17.

 

“44.17 This Section does not apply to proceedings where the claimant has entered into a pre-commencement funding arrangement (as defined in rule 48.2)”.

 

See above for my analysis of this definition, but, as a pre-commencement funding arrangement can, under new CPR 48.2 ONLY be pre-1 April 2013, it follows that any other pre-1 April 2013 arrangement is covered by QOCS.

 

On the face of it a claimant without a CFA or ATE with, say, a £200,000 costs order against them prior to 1st April 2013 does not now have to pay. A costs order where the defendant won on liability is worthless. Where the defendant won on a Part 36 offer, then generally the order is only as good as the level of damages recovered by the claimant.

 

This also highlights one of the odd aspects of the Court of Appeal’s decision in Simmons v Castle (No 2) [2012] EWCA Civ 1288 re the 10% general damages uplift to all claimants who prior to 1 April 2013 did not have a Conditional Fee Agreement with recoverable success fee in place.

 

Such a claimant, for example funded by a before-the-event insurance (BTE) policy, will get 10% extra general damages to compensate them for the non recovery of a non-existent success fee AND will benefit from QOCS to avoid them having to buy adverse costs insurance which in fact they already have through their BTE policy.

 

Furthermore a defendant gets no Part 36 costs protection until a costs order is made, so late acceptance of a defendant’s Part 36 offer does not trigger costs, whereas it did prior to 1 April 2013. So acceptance post  1 April 2013, out of time and the last one, two, three years’ costs liability goes, unless you have a CFA with recoverable success fee or you have recoverable ATE.

 

However I suspect that the defendant will refuse to pay costs unless a set-off for post-Part 36 costs is made, forcing the claimant to go to detailed assessment, except that if the bill is for £75,000 or less it will be a paper-only provisional assessment in the first instance. I hope that no-one in the Court of Appeal is planning any holiday any time soon.

 

 

Retrospective retrospection

 

Are you free to tear up any agreement providing for the recoverability of an additional liability and thus gain QOCS protection?

 

The relevant rule is CPR 44.17 which reads:

 

“This Section does not apply to proceedings where the claimant has entered into a pre-commencement funding arrangement (as defined in rule 48.2).”
New CPR 48.2 is long and complicated but CPR 48.2(1)(a)(i)(aa) – I have not made that up – defines a funding arrangement as itself defined by CPR 43.2(1)(k)(i) – I have not made that up either – as where  “the agreement was entered into before 1 April 2013 specifically for the purposes of the provision to the person by whom the success fee is payable of advocacy or litigation services in relation to the matter that is the subject of the proceedings in which the costs order is to be made;
or
……..”

 

This deals with CFAs, (bb) deals with CCFAs, 48.2(1)(ii) deals with ATE and 48.2(1)(iii) with membership organisation self-insurance.

 

Any one of these disapplies QOCS. By ending any relevant agreement can you disapply the disapplication and retrospectively achieve retrospective QOCS protection?

 

Thus it depends upon the meaning of “has entered into”. Clearly the better wording would have been “had entered into” or “has ever entered into” which would have put it beyond doubt. “Has” is not tense specific. “Has my client got a CFA ?” is present tense.

 

It is clearly arguable either way, but equally clearly the intention of Parliament was to disapply QOCS where recoverability of an additional liability was in place, so on the basis that courts should adopt a purposive construction of legislation, my view is that anyone who has ever had a recoverable liability does not get QOCS protection.

 

Don’t get me started on CPR 48.2(1)(a)(i)(aa) and its reference to the claimant paying the success fee in a pre-1 April 2013 when the whole point of it all is the abolition of recoverability – the client was not allowed to pay the success fee!

 

Thus my view is that an unassignable pre 1April 2013 CFA which provided for a success fee is a bar to QOCS, even though the success fee is not recoverable.

 

That has been reinforced by the decision of Master Haworth in Landau v The Big Bus Company, 31 October 2014, Master Haworth, SCCO.

 

 

After-the-Event Insurance

 

Care needs to be taken in relation to after-the-event insurance, where the position is slightly different. The policy is between the client and the after-the-event insurance company and therefore there is nothing to stop the policy continuing and, in the case of a pre 1 April 2013 premium, remaining recoverable from the other side.

 

However many after-the-event insurance policies provide that the policy ends if the client moves firms.

 

If the after-the-event policy is cancelled then clearly the premium will not be payable by anyone and this is not recoverable, whatever the outcome of the case; the after-the-event insurer is off risk but has also lost any chance of getting a premium and typically such premiums are not paid by anyone until the end of the case and in the event of defeat are not paid at all.

 

If the policy is not cancelled, then there should be no problem. If it is then there are a variety of options:-

 

  1. to continue without after-the-event insurance in place;

 

  1. for the new firm to self-insure, that is to accept liability for any adverse costs Order; this is perfectly lawful – see Sibthorpe and Morris v Southwark London Borough Council (Law Society intervening) [2011] EWCA Civ 25;

 

  1. for the new firm to fund the unrecoverable after-the-event insurance premium; the lawfulness of this has been confirmed by the Court of Appeal in Flatman and Germany v Weddall and Barchester Health Care Limited [2013] EWCA Civ 278;

 

  1. for the client to pay the premium himself; generally such a premium is a so-called “silver bullet” one which is payable only in victory, and therefore the client would not physically have to pay anything out unless and until the case is won; payment can then be taken by deduction from damages;

 

  1. for the solicitor to self-insure or arrange the insurance and pay for it out of an overall charge to the client, typically 25% of damages in a post-31 March 2013 Conditional Fee Agreement, although it is perfectly permissible to charge more, say 30%, to reflect the extra service of providing an indemnity against adverse costs.

 

In any situation where the client pays, directly or indirectly, for the after-the-event insurance premium he or she is likely to have a valid complaint that this expense has been forced upon him or her by the conduct of both the outgoing firm and the incoming firm.

 

In my view, in the absence of the after-the-event insurer allowing the policy to continue with the new firm, the firms should arrange between them for the insurance to be obtained, or an indemnity given, at no cost to the client.

 

Clearly the most satisfactory outcome is for the After-the-Event insurance provider to agree to allow the policy to continue with the new or merged firm and the After-the-Event insurer in each case should be approached and be asked to agree.

 

Clearly the benefit to the After-the-Event insurer is that they stand to recover a premium in a case which they had previously agreed to insure and where the risk profile should not have changed.

 

Note that in clinical negligence cases an element of the after-the-event insurance premium remains recoverable even if the insurance is taken out after 31 March 2013.

 

By virtue of a new Section 58C(2) to (4) of the Courts and Legal Services Act 1990 the Lord Chancellor is empowered to make Regulations allowing recovery of just that element of an after-the-event insurance premium relating to the costs of a claimant’s own risk of having to pay for one or more expert’s reports.

 

The Recovery of Costs Insurance Premiums in Clinical Negligence Proceedings (No 2) Regulations 2013, effective 1 April 2013, provide that recovery of the ATE premium is only allowed if

 

  • the financial value of the claim for damages in respect of clinical negligence is more than £1,000; and

 

  • the risk insured is of incurring liability to pay for an expert relating to liability or causation, and

 

  • recoverability is limited to that part of the premium relating to the “risk of incurring liability to pay for an expert or reports relating to liability or causation in respect of clinical negligence in connection with the proceedings.”

 

See my related blogs

CLINICAL NEGLIGENCE AND ATE RECOVERABILITY

CFAS: NEVER NAME THE DEFENDANT! (1)

CFAS: NEVER NAME THE DEFENDANT! (2)

 

Written by kerryunderwood

March 7, 2013 at 1:19 pm

Posted in Uncategorized

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