Regulation 4(2)(c) lives on

Under the old Conditional Fee Agreement Regulations 2000 a solicitor had a duty, before entering into a CFA, to inform the client “whether the legal representative considers that the client’s risk of incurring liability for costs in respect of the proceedings to which agreement relates is insured against under an existing contract of insurance” (Regulation 4(2)(c)).  Failure to comply would generally render the CFA unenforceable (see Myatt v National Coal Board [2006] EWCA Civ 1017). 
The CFA Regulations have now been revoked.  Does that mean that a powerful weapon has been lost to defendants and that sloppy claimant solicitors can rest easy?  Not necessarily.  A fascinating decision has recently emerged from the Senior Courts Costs Office that suggests this issue may still be a live one.
The decision in Thomas v Butler and Other T/A Worthingtons Solicitors [2009] EWHC 90153 (Costs) concerned a solicitor/own client assessment but there is no reason to suppose the decision would have been any different if this had been an inter partes assessment.  The key issue that arose was whether the solicitors had complied with their duties under the Solicitors Costs Information and Client Care Code 1999 that was in force at the time (and remained in force until 30 June 2007) which states:
“4. Advance costs information – general
The overall costs
(a) The solicitor should give the client the best information possible about the likely overall costs, including a breakdown between fees, VAT and disbursements.
Client’s ability to pay
(j) The solicitor should discuss with the client how and when any costs are met, and consider:
(i) whether the client may be eligible and should apply for legal aid (including advice and assistance);
(ii) whether the client’s liability for their own costs may be covered by insurance;
(iii) whether the client’s liability for another party’s costs may be covered by pre-purchased insurance and, if not, whether it would be advisable for the client’s liability for another party’s costs to be covered by after the event insurance (including in every case where a conditional fee or contingency fee arrangement is proposed); and …”
Having considered the evidence presented, Master Campbell concluded:
“Having considered this course of events revealed by the contemporary documents, I am satisfied that Worthingtons [the Claimant’s solicitors] did not comply with the Code and I reject Mrs Nicholaou’s [the fee earner] evidence that she used her “best attempts to ‘discover’ pre-existing legal expenses insurance, none was identified” as the points of reply contend.  Whilst it may be correct that Mrs Nicholaou examined Mr Thomas’ home insurance policy for LEI cover and found none, Mrs Nicholaou knew from the papers she had received from Irwin Mitchell that there was a policy with Lawclub.  Accordingly she had a duty under paragraph 4(j) (ii) and (iii) of the Code to explore that policy further.
In breach of the Code, Mrs Nicholaou failed to discuss funding options adequately and compounded the problem by omitting to contact Lawclub.
It follows, for the reasons I have given, that I consider that Worthington‘s costs have been unreasonably incurred in this case. Had Mrs Nicholaou followed the Code correctly and investigated the availability of the Lawclub policy as Mr Thomas had instructed her to do, he would not have been obliged to meet Worthington’s costs out of his own pocket; either the firm would have acted for him under a CFA backed by Lawclub or he would have taken his case elsewhere to another firm which would have done so. Under CPR 44.4(1) the court “will not allow costs which have been unreasonably incurred.”  Accordingly, the fees that have been unreasonably incurred must be disallowed and any sums that Mr Thomas has paid to Worthingtons fall to be returned to him with interest.”
(One odd thing to note about this judgment is that the Code states that certain information “should” be discussed.  Not “must”.  Master Campbell has previously interpreted “should” as being no more than a recommendation (see Metcalfe v Clipston [2004] EWHC 9005 (Costs) and Cullen v Chopra [2007] EWHC 90093 (Costs).  On this occasion he appears to have treated “should” as introducing a mandatory requirement.) 
If correct, not only does this decision reintroduce Regulation 4(2)(c) challenges by the back door but throws open a whole host of other challenges for failure to comply with the Code.  Although the 1999 Code is no longer in force, similar requirements now appear in the Solicitors’ Code of Conduct 2007.

One should perhaps be cautious about reading too much into this case as it was very fact specific.  What was no doubt at the front of Master Campbell’s mind was the fact that the Claimant had given clear instructions that he wished his claim to be dealt with by way of a CFA backed by his legal expenses policy.  This was not done. 
However, it has been a question that has long troubled legal costs practitioners as to whether switching the consumer protection element from the Regulations to the solicitors’ rules really ended the scope for challenges.  As Cook on Costs 2010 puts it:
“It is supremely optimistic to hope that transferring regulation to the SRA will put an end to future costs satellite litigation.  If the solicitor contravenes the code of conduct, which has the same statutory force as the revoked regulations, cannot the client still contend that the retainer is unenforceable … thereby enabling the paying party to rely on the indemnity principle to avoid liability for payment?”
Happy days are here again.

2 thoughts on “Regulation 4(2)(c) lives on

  1. Been a follower of this blog for sometime now, very informative and i really enjoy reading it. My name is Paul Elder and I am a costs draftsman and I work on both 'sides' i.e claimant and defendant. I did have a question about this post…

    "happy days are here again"

    my reaction was i'm not entirely sure about that; as you say this case was very fact specific. This case had previous solicitors who had run it on a CFA, thus the non-compliance with the code etc on the new solicitor's part was more 'obvious' to see. Is your interpretation of this case such that you feel it could be applied across the board going forward and bring about the old 'Reg 4' style challenges? If so what's your impression on how likely such arguments will be to succeed?

    Only reason i ask is I was under the impression that nowadays non-compliance with the code is only 'actionable' at the instance of the client rather than the paying party, therefore how can the paying party escape paying costs unless the solicitor's client complains re: non-comliance with the code?

    would really appreciate your comments on this as i am slightly confused – happy to be corrected of course, many thanks in advance

  2. Paul,

    You raise some interesting questions about this case. Part of the problem is that the judgment is not as fully reasoned as it might be.

    The Code did not operate in the same way as the CFA Regulations. There was no automatic consequence for non-compliance and I do not think the judge was ruling that a breach automatically rendered the retainer invalid.

    He seems to have adopted a causation based approach. If the solicitors had complied with their duties under the Code the client would have entered into a CFA or gone elsewhere. The failure to comply with the Code meant the case was not conducted under a CFA (or under a CFA with another firm) and the client was therefore out of pocket when the case was lost. On that basis the judge ruled all costs to have been unreasonably incurred.

    An odd part of the judgment is that the judge seems to have accepted that it might have been necessary to undertake some work before the insurance position was resolved (see paragraph 56) due to the problems over limitation. However, rather than decide that some initial work was recoverable, but all work after a certain period was not, he disallowed everything. This seems to go against the causation approach.

    Given his judgment (paragraph 66) that the work was unreasonable in the sense of CPR 44.4(1), it appears the point would have been equally open to a defendant as to the client and did not require the client to have complained first. Costs are "unreasonable" or not regardless of whether a client complains.

    Quite how wide the scope for further Regulation 4 style challenges is still very uncertain. Here, the judge decided that the privately funded costs were unreasonable because the possibility of a CFA had not been explored. Regulation 4 challenges have, obviously, previously been brought on the basis that it was not reasonable to enter into a CFA (at least without checking alternative funding first). Does this judgment open the door to challenges where the case is funded privately but not where there is a CFA? This case throws up as many questions as it answers.

    I suspect the courts will, in general, be reluctant to allow for this type of challenge to be raised by defendants but this is one foot in the door.

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