Kerry Underwood

SWITCHING FUNDING ARRANGEMENTS

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Switching funding arrangements can make a very significant difference to the potential liability of a paying party.

Recently the courts have considered two different scenarios and arrived at different conclusions:

(i) allowing a switch from a Damages Based Agreement to a Conditional Fee Agreement; but

(ii) disallowing a switch from legal aid to a Conditional Fee Agreement as far as recoverability from the other side was concerned.

Damages Based Agreement to a Conditional Fee Agreement

 

In Dial Partners LLP & Anor v Eastern Airways International Ltd & Ors [2018] EWHC B1

 

the Senior Courts Costs Office held that a claimant and solicitor could switch funding from a Damages Based Agreement (DBA) to a conditional fee agreement and recover costs from a third party under the conditional fee agreement, even though they were much higher than the maximum allowed under the DBA.

This was in spite of the fact that the defendants were informed of the fact that the matter was being funded under a DBA, which strictly limits recoverability, but were not then informed that the claimants had switched to a conditional fee agreement, with unlimited recoverability, 10 days before settlement.

The defendants say that they factored in the DBA limited costs liability when deciding to settle the matter.

The defendants sought to rely on

 

 Kellar v Williams [2004] UKPC 30

 

where the Privy Council held that where a costs agreement was amended after judgment, and hence after the making of the costs order, the paying party could elect to pay costs under the old agreement or the new one, as best suited then.

 

In Oyston v Royal Bank of Scotland [2006] EWHC 90053 (Costs)

 

the court said.

 

“Following the decision of the Privy Council in Kellar, it cannot be right that a Deed of Variation can be used to impose a greater burden on the Paying Party than existed before Judgment. The fact that the Client is in agreement, is of no assistance.”

 

The defendants also relied upon

 

Radford v Frade [2016] Costs LR 633,

 

where the court said

 

“The underlying rationale is in my judgment that the effect of a Costs Order is to create a liability, subject to Assessment, those costs which a party has paid or is liable to pay at the time the Order is made. The liability to pay costs crystallises at that point and, although its quantum will remain to be worked out, that process must be governed by the liabilities of the Receiving Party as they stand at that time. To allow enforcement of a retrospective agreement which increases those liabilities would be to alter retrospectively the effect of the Court’s Order.”

 

“23.      Again, Mr Williams’ criticism of the Judge seems to me to involve a mistaken analysis of his reasoning. The Judge did not start with a contractual interpretation and treat the risk assessment as “amending” or “curtailing” it, or as overriding or altering that interpretation. He treated the risk assessment as one factor in arriving at a single conclusion on the true construction of the key CFA wording. He was clearly justified in that approach. The risk assessment does serve the purpose of explaining the solicitors’ reasons for setting the success fee at the chosen level. But it is also a contemporaneous statement by the solicitors to their clients, identifying their understanding of the clients’ aim, the issues with which they would be dealing, the nature of the risks they were taking on in doing so, and what would amount to success. It is therefore objective evidence as to the scope of the work for which the parties intended to contract. It supports the narrow interpretation of the words “your claims…” which the Costs Judge adopted.

  1. As for the Covering Letter. this is an “extraneous” document in that, unlike the risk assessment, it does not form part of the contractual documentation. But in a broader sense it is part of the “package”. It is part of the factual matrix, as Mr Williams accepted in the course of argument. The Judge was not wrong to take account of it. As it happens, it is not obvious to me that he placed great weight on this document. But he was entitled to regard it as a communication between the contracting parties which could have “affected the way in which the language of the document would have been understood by a reasonable man.” It is proper, in construing the CFA, to give weight to the fact that the Covering Letter identifies the role of TH and Counsel as “to deal with the procedural position in England”. These were words of limitation, distinguishing the procedural issues from the substantive merits of the claim.
  2. Although the Costs Judge’s citation of passages from Mr Daulby’s witness statement might appear, if viewed in isolation, to place some reliance on the subjective intentions of TH, I do not believe that is a fair reading when regard is had to the context in which those citations appear. Mr Williams made clear that he was not suggesting that the Costs Judge had made impermissible use of the evidence filed by his clients, and rightly so in my view. The Costs Judge was well aware that the exercise calls for an objective assessment. Much of what Mr Daulby said was evidence of the factual matrix at the time, though it did not really add to what was evident from the documents of which the parties had shared knowledge. If, and to the extent that, the passages cited went beyond that, the Costs Judge was in my judgment doing no more than underlining the fact that his objective interpretation of the contractual wording was consistent with what Mr Daulby says were his subjective aims and intentions.
  3. The Judge’s reliance on what the parties contemplated at the time was not wrong. He did not treat this as a principle of interpretation. He treated it as an element of the factual matrix in which the parties used the words about “your claims …”. He was right to do so. It is of course open to the parties to a CFA to define the work covered by the agreement in such a way that it extends to work involving claims and/or defendants other than those in contemplation at the time of the agreement. This is often done, and examples were provided in the course of argument. The question here however is whether that is what these parties did, by the particular wording they used in this CFA. I consider the Costs Judge was right to conclude that they did not.
  4. The way the reasonable person would have seen this at the time is, put bluntly, that TH did not want to risk working without reward on anything other than the procedural applications challenging service and jurisdiction which were in the contemplation of the parties at the time of the CFA. They were unwilling to do work under a CFA which involved addressing the merits. It is not a good enough answer to point, as Mr Williams does, to the get-out clause. That would have allowed TH to end the agreement if they thought the clients were “unlikely to win”. But it by no means follows that they were happy to take on work of wider scope. The perceived merits of the client’s position are not the only factor that can influence a lawyer’s decision on whether or not to undertake work on a CFA. The lawyer will normally consider the scale as well as the degree of risk. On the wider interpretation, the CFA would have obliged TH to work on a merits-based application to dismiss, provided it was “likely” to succeed, whatever the scale of the commitment involved. TH themselves had made quite clear that they saw the task of assessing the merits as a huge one, and the case as a vastly expensive one to fight.

 

  1. As Mr Hutton concedes, this last point has some superficial attraction. It is however substantially met by the answer he offers. The Retainer Letter served a number of purposes, not all of which were met by the CFA. One of these is compliance. I believe I can take judicial notice of the existence of regulatory requirements for the provision of client care letters. But regardless of that, the Retainer Letter and its accompanying “Information for Clients” document contain a range of provisions regulating the overall relationship between solicitor and client, which are not to be found reflected in the CFA. These are provisions which any prudent solicitor would wish to ensure were in place between him and his client. These include provisions as to conflict of interest, the responsibilities of the parties, confidentiality, limitation of liability, and a host of other matters. For these reasons it made complete sense for TH to send a Retainer letter to their new clients, the corporate defendants, even if the intention was for them to enter into a CFA. Furthermore, it remained at this point for the clients to decide whether they wished to enter into the CFA. It was at that stage an offer, not a contract. For these reasons the reissue of the Retainer Letter does not in my view serve to contradict or undermine the Costs Judge’s conclusion.
  2. The question remains of whether the Costs Judge was wrong to conclude that the CFA revoked the extant “traditional” retainer in its entirety. This is again a question of what the parties meant by their agreements, objectively assessed. The last sentence of Mr Daulby’s paragraph 10 (see [19] of the November Ruling) was either his after-the-event analysis of the situation, or evidence of his subjective intentions. Either way, it is inadmissible as an aid to the resolution of this issue. I do not consider it to represent the true position, objectively assessed. Analytically, it seems to me, the Costs Judge’s conclusion amounts to a finding that the parties agreed, upon entering into the CFA, to discharge the existing retainer and replace it with that agreement. In my judgment that is a proper interpretation of their conduct at the time. The reasonable person, looking at the Covering Letter, the CFA and the other enclosures against the background of the previous exchanges between TH and the defendants, would conclude that the CFA was being offered as one of the “alternative ways of funding your case” referred to in the Information for Clients document. The offer to the clients, which they accepted, was to substitute the traditional retainer with a more limited CFA.”

Here, the court also considered

 

Surrey v Barnet and Chase Farm Hospital NHS Trust and others [2016] EWHC Civ 1598 (QB)

 

and concluded that the defendants had not established a “genuine issue” as required by that case, regarding the reasonableness of the switch.

 

Legal Aid to Conditional Fee Agreement

 

In Surrey v Barnet and Chase Farm Hospitals NHS Trust [2018] EWCA Civ 451

the Court of Appeal held that the additional liabilities of a success fee and After the Event insurance premium were not recoverable in circumstances where the solicitors switched from legal aid to a conditional fee agreement shortly before the deadline for the abolition of recoverability of additional liabilities.

Recoverability was abolished by the Legal Aid, Sentencing and Punishment of Offenders Act 2012 and came into force in relation to conditional fee agreements signed on or after 1 April 2013.

Thus, where there was a conditional fee agreement and/or After the Event insurance premium in place before 1 April 2013, then those elements were recoverable from the other side.

This case involved three clients whose funding arrangements were switched from legal aid to conditional fee agreements in March 2013 and where the legal aid certificates had been entered into seven years earlier.

The District Judge held that these additional liabilities were not recoverable, but that was overturned on appeal to the High Court.

The Court of Appeal has now allowed the defendants’ appeals and restored the decision of the District Judge.

 

The District Judge had said:

 

“Where one of two or more options available to a client is more financially beneficial to the solicitor, the need for transparency becomes even greater.”

 

The Court of Appeal approved that and added:

 

“This a reflection of the fundamental principle of equity that where a person stands in a fiduciary relationship to another, the fiduciary is not permitted to retain a profit derived from that fiduciary relationship without the fully informed consent of the other.”

(Court’s italics)

 

The Court of Appeal also said:

 

“The bottom line is that in each of the three cases the advice given to the client had exaggerated (and in two cases misrepresented) the disadvantages of remaining with legal aid funding; and had omitted entirely any mention of the certain disadvantages of entering into a CFA.”

 

A key part of the finding revolved around the fact that in all cases where a client did not have a pre LASPO funding agreement, then general damages were to be increased by 10%, following the Court of Appeal’s decision in Simmons v Castle.

This applied to all cases, whenever they commenced, and the deciding issue was whether or not there was a pre LASPO conditional fee agreement with a recoverable success fee.

Thus the effect in these cases was that by switching from legal aid to a conditional fee agreement, the clients lost the benefit of that 10% uplift in damages.

Here, the Court of Appeal said that in each case the claimant’s litigation friend was not told by the solicitors that by moving to a conditional fee agreement they would lose this 10% uplift.

The High Court judge should not have interfered with the findings of fact made and the discretion exercised by the District Judge and Masters originally.

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Written by kerryunderwood

April 17, 2018 at 8:22 am

Posted in Uncategorized

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