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The recent Court of Appeal decision in C v W  EWCA Civ 1459 was concerned with a CFA with a success fee that was entered into after liability had been admitted by the Defendant’s insurers. This judgment, in many respects, follows the earlier decision of Haines v Sarner  EWHC 90009 (Costs), in which Simon Gibbs acted for the Defendant. In relation to Part 36 offers, CFAs normally contain one of the following two clauses:
‘It may be that your opponent makes a Part 36 offer or payment which you reject on our advice, and your claim for damages goes ahead to trial where you recover damages that are less than that offer or payment. If this happens, we will not add our success fee to the basic charges [emphasis added] for the work done after we received notice of the offer or payment.’
‘It may be that your opponent makes a Part 36 offer or payment which you reject on our advice, and your claim for damages goes ahead to trial where you recover damages that are less than that offer or payment. If this happens, we will not claim any costs [emphasis added] for the work done after we received notice of the offer or payment.’
The CFA in C v W contained a variation similar to the second clause. The distinction between these two clauses is crucial. The first one does not put the solicitor at risk in relation to Part 36 offers – they will still be paid their base costs. The second clause does, as failure to beat a Part 36 offer will mean the solicitor recovers nothing from that point onwards.
The judge at first instance allowed a 70% success fee. At the initial appeal this was reduced to 50% but the Defendant appealed again on the basis that the amount was still too high. The Court of Appeal held:
• “In the absence of any evidence that the accident had been caused by anything other than negligence on the part of the driver and in the light of the fact that his insurers had already admitted liability on his behalf, it is difficult to see how Mrs. C could have failed to recover substantial damages given the serious nature of her injuries. Mr. Post submitted that the defendant might have applied to withdraw the admission and contest liability, but that was little more than a theoretical possibility in the absence of some evidence to suggest that the accident occurred without any fault on his part. It follows that the chance of success in this case was very high and the risk of losing correspondingly low – certainly no more than 5% and probably rather less. Applying the ready-reckoner, that would give a basic success fee of at most 5% rather than the 33% calculated by Taylor Vinters.”
• It was wrong to add a further 20% success fee to reflect the size of the claim. “It is probably true in general that high value claims tend to be more complex and to involve a greater amount of work than claims of lower value, but that does not of itself increase the risk of losing. If more work is done the base fees are inevitably higher, but the application of a percentage success fee means that the amount recovered by the solicitor if the claim succeeds is correspondingly greater.”
• The main issue in this case related to the risk of failing to recover part of the solicitors’ fees because of the Part 36 clause. “Given that the CFA was entered into before proceedings had been commenced, that called for an analysis of several contingencies, each of which was difficult to assess individually, and which together made the task almost impossible. They included the chance that a Part 36 offer would be made, the chances that it would be made at an earlier or later stage in the proceedings, the chance that they would advise Mrs. C to reject it, the chance that she would accept their advice and the chance that, having rejected the offer, she would fail to beat it at trial. … The timing of an offer was … potentially of some importance because only fees earned by the solicitors after its rejection would be at risk; fees earned up to that point would be secure. … The task facing Taylor Vinters in May 2001 was to assess, as best they could, the risk of losing part of their fees for reasons of that kind, and then expressing that as a percentage of the total fees likely to be earned to trial.”
• It was wrong to allow a further success fee element to reflect the risk the Claimant might not pursue her case. If that had happened, the solicitors, under the terms of the CFA, would be entitled to look to the Claimant for payment in any event. The solvency of the Claimant was not a factor that the success fee was designed to cover.
• Although calculating the real risk in a case such as this was a difficult task, it did not follow that it was unreasonable to enter into a CFA in this situation.
• “However, given that the risks associated with [the Part 36 clause] are so difficult to assess, it would, perhaps, be worth considering whether it would make sense for solicitors who wish to offer it to include in the CFA a variant of the two-stage success fee discussed in Callery v Gray  EWCA Civ 1117, in the form of a clause giving them the right to review the success fee once an offer to which the clause applies has been made. Both parties would be sufficiently protected against an excessive increase by the right to require a detailed assessment.” In what is otherwise a very carefully considered judgment this is the one worrying aspect. It appears to raise a number of the potential problems identified above in relation to Forde. It is to be hoped that this passage is actually to be interpreted as suggesting a “break clause” in CFAs. An initial success fee would apply to deal with the claim up until the stage liability is resolved. At that point, what is in reality closer to being a second CFA with a different success is agreed that reflects the Part 36 risks at that point. This would be entirely sensible and fair to all parties.
What the judgment almost touched on, but did not actually consider, is whether it is ever permissible to enter into a CFA that does not include a clause putting the solicitors/counsel at risk in relation to Part 36 offers where there has already been judgment on liability entered for the Claimant. Where an admission is made pre-proceedings then it probably is reasonable to have a CFA with a small success fee to reflect the, at least “theoretical”, possibility it might be withdrawn. Lord Justice Moore-Bick, in the leading judgment, stated:
“…I should make it clear that there is nothing unreasonable in my view in entering into a simple CFA at a time when liability has been admitted provided that the parties make a proper assessment of the inevitably much reduced risk of failure.”
What does “simple CFA” mean? Is it meant to refer to one that contains one or other of the Part 36 risk clauses identified above? If the CFA does not contain a clause putting the solicitors/counsel at risk on Part 36 offers, and judgment on liability has already been achieved, what is the risk to the legal representative? They have already achieved a “win” as defined under the terms of a standard CFA and would be entitled to payment of their base costs. Is such an agreement in this situation even lawful? In Arkin v Borchard Lines Ltd  NLJR 970 Coleman J held:
“On the proper construction of [section 58] the only permissible conditional fee agreements are those entered into before it is known whether the condition of success has been satisfied. The provision in section 58(1) that:
‘In this section a ‘conditional fee agreement’ means an agreement in writing between a person providing advocacy or litigation services and his client which – (b) provides for that person’s fees and expenses, or any part of them, to be payable only in specified circumstances’
clearly referred to circumstances which have not eventuated at the time when the agreement is entered into. The legislative purpose of the legalisation of such agreements was to enable those who could not afford to employ the legal profession to present their case on the basis that their obligation for fees and legal charges by their solicitors and counsel would arise only if the proceedings which were yet to be heard had been successfully prosecuted. It was no part of the purpose of the legislation to provide for agreements to pay fees and expenses which were entered into after the successful conduct of the proceedings.”
On this analysis there is a strong argument that a CFA in this situation would be unlawful. In fact, it is quite common to see just such agreements entered into after judgment has been entered. This is particularly so in the case of counsel becoming involved at a later stage of the claim. It appears that counsel routinely enter into CFAs with large success fees without any proper consideration as to what risk they are purporting to accept. The issue of whether this type of agreement is lawful arises regardless of whether the CFA post-dates the revocation of CFA Regulations 2000 or whether the case is of a type which would otherwise attract a fixed success fee.
The alternate view is that despite purporting to be a CFA, it is not possible to enter into such an arrangement where payment of no part of the fees is actually conditional. Therefore, although such an agreement would not be unlawful, it would not be possible to recover a success fee.
GWS have a number of cases where this is a live issue and we will report any relevant decisions in due course.