McFayden v Liverpool CC

In our last Costs Law Update we reported the decision of Myers v Bonnington (Cavendish Hotel) Ltd [2007] EWHC 90077 (Costs), where a costs judge had held there to be breach of Regulation 4(2)(e)(ii) where the Claimant’s solicitors had recommended an ATE policy but had failed to notify the client that they had an interest in recommending the policy because they were obliged to recommend the policy as part of their membership of the Accident Line scheme. However, he held that the breach was not material because the number of referrals received from the Scheme represented only a small proportion of the firm’s income and that the interest they had not notified of was therefore de minimis.

The Court was faced with an identical challenge, also concerning the Accident Line scheme in the case of McFayden v Liverpool CC (Liverpool County Court, 9/5/07). District Judge Heyworth also found there to have been a breach of the Regulations. However, unlike in Myers, he found the breach to be material as it adversely affected the client’s protection. The client “was placed in a no choice situation” because this was the only policy that could be recommended to him. The Claimant here does not appear to have tried to argue the de minimis point.

Combined with the Myers decision, there are now strong grounds for believing that similar challenges to claims conducted under this scheme will also succeed in showing that there has been a breach of the Regulations. There must also be good grounds for believing that some, if not all, such breaches will also be found to be material.

Bevan v Power Panels Electricals Systems Ltd

The case of Bevan v Power Panels Electricals Systems Ltd [2007] EWHC 90073 (Costs) concerned a claim conducted under a CFA where the case was referred to the solicitors by the claims management company Accident Advice Helpline (AAH). The defendant challenged the validity of the CFA on the grounds that there had been a breach of the now revoked CFA Regulations 2000 and, in particular, the duty on the solicitors to advise whether they had an interest in recommending a particular insurance policy (Regulation 4(2)(e)(ii)) and whether they considered that the client had the benefit of an existing contract of insurance that would cover his potential liability in respect of legal costs (Regulation 4(2)(c)). It was further argued that in failing to state in writing that the solicitors had an interest in recommending the insurance policy there had also been a breach of Regulation 4(5), which required the information under Regulation 4(2)(e)(ii) to be given both orally and in writing.

The CFA, which was a standardised document that all AAH solicitors were obliged to use, stated that “save in so far as we are approved solicitors on the Panel of Accident Advice Helpline with whom you have entered into an agreement which provides for the insurance to be arranged we confirm that we do not have an interest in recommending this particular insurance policy or funding arrangement”. The solicitors believed that in truth there was such an interest, because they were obliged to recommend the policy under the arrangement with AAH, and therefore prepared a separate Oral Explanation sheet to address this issue. That read:

“We do have an interest in recommending this particular insurance because we are tied by our membership of AAH to offer all clients who enter into a CFA with us this insurance. We are not insurance brokers and there may be cheaper different insurance available. In all the circumstances we believe this is a reasonable insurance policy to fund this claim.”

In relation to the appropriate enquiries to make concerning pre-existing insurance, this had been the subject of detailed guidance by the Court of Appeal in Myatt v National Coal Board [2006] EWCA Civ 1017. That Court recognised that the appropriate enquiries to make of a client would depend in part on the nature of the client:

“If the client is evidently intelligent and has a real knowledge and understanding of insurance matters, it may be reasonable for the solicitor to ask him not only (i) whether he has credit cards, motor insurance or household insurance or is a member of a trade union, (ii) whether he has legal expenses insurance, but also (iii) the ultimate question of whether the legal expenses policy covers the proposed claim and, if so, whether it does so to a sufficient extent. Litigants such as the Myatt claimants and Ms Garrett plainly do not fall into this category: few litigants will. If the solicitor does ask such questions, he will have to form a view as to whether the client’s answers to the questions can reasonably be relied upon.”

In Bevan, the solicitors had asked the client: “have you got insurance”. It was argued for the Claimant that this was the least specific question that could be asked and therefore the least likely to miss the existence of BTE legal expenses insurance. If the question was answered in the affirmative, then the solicitor would ask to see the insurance polices to determine whether BTE cover was attached. Here, the Claimant had confirmed that neither he nor any member of his family had any insurance of any kind.

The judge held that the Claimant had been asked the wrong question to determine the existence of BTE cover. Although it was accepted that the Claimant was intelligent and articulate, he was a 22 year old electrician and the judge was of the view that he was not likely to have had much experience of insurance polices. In his view:

“…I do not agree with Mr Filar’s view (at least in this case) that the question ‘Do you or your family have any insurance’ was overwhelmingly likely to be answered correctly. The question most likely to produce a correct answer would, in my judgment, have added words which focussed on the sorts of documents there might have been such as credit cards, motor insurance or household insurance and whether he or any of his family had trade union membership.”

He concluded that the specific guidance given in Myatt should have been followed. As such there was a material breach of Regulation 4(2)(c) such as to render the CFA invalid. This aspect of the decision is perhaps surprising as a client who states he does not have any insurance is unlikely to believe he does in fact have, for example, household insurance.

In relation to Regulation 4(2)(e)(ii), the judge was satisfied that the oral advice given to the Claimant did properly disclose the solicitors’ interest in recommending the policy. He concluded that the Regulation was complied with simply by stating whether they had an interest in recommending the policy. It was not necessary to explain what that interest was. This aspect of the decision should be compared with Brady v Rec-Tech Leisure Ltd (Tunbridge Wells County Court, 24/4/07) (see Costs Law Update).

However, there had nevertheless been a breach of Regulation 4(5) in failing to also give the information in writing. That breach had a materially adverse effect on the protection afforded to the client. It further had a materially adverse effect on the administration of justice because express provisions relating to the steps to be taken in litigious matters should be observed. It followed that the CFA was unenforceable.

Challenge to Accident Line Protect Scheme

Judgment has recently been handed down in a challenge to the validity of Conditional Fee Agreements (CFAs) entered into under the Law Society approved Accident Line Protect Scheme. The case was heard by a Master of the Supreme Court Costs Office (SCCO). A full copy of the judgment, Myers v Bonnington (Cavendish Hotel) Ltd [2007] EWHC 90077 (Costs), can be found here.

The case centred around the issue of whether there had been a breach of Regulation 4(2)(e)(ii) of the now revoked CFA Regulations 2000, which required the legal representative to inform the client before a CFA is entered into:

“(e) whether the legal representative considers that any particular method or methods of financing any or all of those costs is appropriate and, if he considers that a contract of insurance is appropriate or recommends a particular such contract –

(ii) whether he has an interest in doing so.”

In Garrett v Halton Borough Council [2006] EWCA Civ 1017 the Court of Appeal had held to be invalid a CFA where the solicitors had failed to inform the client that they had an interest in recommending an insurance policy. This was on the basis that, although the solicitors had told their client that they were on a claims management company’s panel, they had failed to inform the client that they thereby had an indirect financial interest in recommending the policy, because if they did not do so they would have their panel membership withdrawn. The Court concluded that the profit generated by cases referred was likely to be of greater significance to the solicitors than any commissions that might be paid on insurance premiums. It was this failure to disclose to a client that they had financial interest in remaining on the panel, which would be lost if the client did not accept their recommendation that they enter into this specific After-the-Event (ATE) policy, that amounted to a material breach of the regulations, as the client did not know that the solicitors were recommending the policy because this was dictated by their financial interest.

Similar challenges to the Accident Line Protect Scheme have long been on the horizon, but Myers appears to be the first reported decision. The Claimant’s solicitors, in the CFA, had recommended that the client obtain an ATE policy with Accident Line Protect and stated that they did “not have an interest in recommending this particular insurance agreement”.

The relevant facts of the Scheme which emerged were that:

- The Scheme included a referral service of potential clients to the solicitors.

- The Scheme’s operating manual required the solicitors to comply with all requirements in the manual.

- The manual required the solicitors to issue an Accident Line Protect insurance policy in all eligible CFA cases, whether or not the client had been referred by the Scheme.

- The solicitors could have their membership terminated if they breached any of the procedures in the operating manual.

The similarities with the facts in Garrett can be seen in that the solicitors had failed to notify the client of the financial interest they had in the recommending the particular ATE policy – their continued membership of the Scheme that might be lost if they did not use this policy. Nor had they informed the client that they were obliged to recommend the policy in all cases.

Master Rogers concluded that there had indeed been a breach of the Regulations due to the failure to make it clear to the client that there was an obligation on them to recommend the particular policy. However, to invalidate a CFA not only must there be a breach but that breach must be material. The test developed in Hollins v Russell [2003] EWCA Civ 718 was:

“Has the particular departure from a regulation pursuant to section 58(3)(c) of the 1990 Act or a requirement in section 58, either on its own or in conjunction with any other such departure in this case, had a materially adverse effect either upon the protection afforded to the client or upon the proper administration of justice?”

Here the Claimant argued that any interest which had not been declared was to be treated as de minimis. This assertion was supported by evidence that showed that, between 2000 and 2006, only 24 cases out of 26,217 new files opened by the firm were Accident Line referrals. Such referrals accounted for 0.3% of the firm’s total income. It was argued that the facts in this case could be distinguished from those in Garrett, which proceeded on the basis that there was a major dependence by the solicitors on the referral scheme. For the same reason, Master Hurst’s decision on the same issue, in Andrews v Harrison Taylor Scaffolding [2007] EWHC 90071 (Costs), could also be distinguished as the solicitors there were receiving 95% of their work from the referral scheme.

Master Rogers accepted the Claimant’s submissions and held the breach to be immaterial for the following reasons:

- He concluded that it would not have made any difference if there had been proper disclosure as the Claimant was an established client of the firm and “would have no idea of how better or different types of policy could be obtained”.

- He considered it “significant” that the client using the same solicitors in a previous personal injury claim had used the very same policy.

- He was satisfied that the case could be distinguished from Garrett and Andrews on the basis that any interest not declared was de minimis.

This judgment, although not binding, does raise a number of interesting issues and is clearly not immune to criticism. The conclusions in relation to the fact that the client had used this policy before and the relative proportion of Accident Line referrals to the firm obviously make the decision very case sensitive.

The fact that the Claimant may not have known of any better policies does not appear to be a justification for a solicitor departing from the requirements of the Regulations. The Court of Appeal held in Garrett that the fact that “clients rarely show any interest in [explanations about insurance] is not a good reason for not giving effect to the plain intention of Parliament”. It would be surprising if the ignorance of the client about ATE insurance were a reason to give less rather than more information on the issue.

The decision that the interest was de minimis is the most problematic element. If a solicitor recommended a policy that paid them commission of £500, would that be de minimis on the basis that £500 represented only 0.01% of a large firm’s income? It seems unlikely. It might represent a small element of a firm’s overall income but would be reasonably significant in terms of the potential profit on the case itself. Why then should the value of referrals in this case have been so treated? The work may have only represented a small proportion of the overall income of the firm but the very fact that the firm was a member of the Scheme was presumably on the basis that they valued such work.

If the de minimis issue is to be interpreted in this way, how will that impact on other detailed assessments? Will paying parties demand details of the financial affairs of solicitors’ firms in all similar cases to determine the relative value of any referrals? The Courts have tended to discourage “fishing expeditions” unless a genuine issue has been raised and have accepted the signature on the Bill of Costs as evidence of general compliance with the Regulations. However, how can a solicitor self-certify whether the value of any such interest should be treated as de minimis? If 0.3% is to be so treated, what about 2% or 5%? Is 5% of a large firm’s income to be treated as more significant that 5% of a small high street practice or vice versa? Or, given the decision that there had been a breach of the Regulations, does the onus shift to the solicitors to show, by detailing their financial affairs, that the interest was not significant and therefore the breach was not material? What will such an exercise do to the costs of detailed assessment?

The purpose of the Regulations, as accepted by the Court in Garrett, was “to protect the client—to ensure so far as possible that she understands what she is letting herself in for and is able to make an informed choice amongst the funding options available to her”. How can the de minimis conclusion in this case provide for such protection? Whether the value of membership of the Scheme to the solicitors was large or small, the client has not been provided with an explanation as to the true reason this policy was being recommended and therefore did not receive the protection that the Regulations were designed to provide. The client is only concerned with receiving proper advice in relation to their claim. If they do not receive that advice, because they are not told the true reason for the recommendation, it is hard to see how that is de minimis from the client’s perspective.

As noted above, this decision is not binding and was case specific. However, the conclusion that there had been a breach of the Regulations, by failing to explain the obligation to recommend the policy, is equally likely to apply in all other Accident Line Protect Scheme matters. Whether other firms would be able to survive the de minimis test, or whether other judges would be as willing to apply it in the same manner, remains to be seen. Given this was a Law Society recommended scheme, the courts may be reluctant to find that all CFAs run under the Scheme were unlawful. Nevertheless, this issue is likely to head to the higher courts.

Suinner v FBN Bank (UK) Limited

In the case of Suinner v FBN Bank (UK) Ltd [SCCO] 22/2/07 the Claimant instructed Sherringtons solicitors to act for him in relation to an EL matter under a Conditional Fee Agreement (CFA). The CFA recommended that the Claimant take out an after-the-event (ATE) insurance policy with Costsupport. The CFA stated that: “This is because” but was then blank where the reasons for the recommendation should have appeared. This prima facie amounted to a breach of Regulation 4(2)(e)(i) which requires the legal representative to inform the client before a CFA is entered into:

“(e) whether the legal representative considers that any particular method or methods of financing any or all of those costs is appropriate and, if he considers that a contract of insurance is appropriate or recommends a particular such contract –

(i) his reasons for doing so, and
(ii) whether he has an interest in doing so.”

Whether the breach was material became obvious from the nature of the ATE policy that had been recommended. The policy premium was calculated as being a percentage (20%) of the damages recovered. This is an unusual method of calculation and had been the subject of previous judicial consideration by the Senior Costs Judge, Master Hurst, in Pirie v Ayling [2003] EWHC 9006 (Costs). He concluded that although such a method was lawful, it was inherently flawed and substantially reduced the amount claimed. What was significant about this decision, which was made prior to Mr Suinner instructing Sherringtons in his claim, was that the Claimant’s solicitors in Pirie were also Sherringtons. (Coincidentally, Simon Gibbs who appeared for the Defendant here also acted for the Defendant in that case.) Therefore at the time that they were recommending that Mr Suinner obtained a policy with Costsupport they were already aware that the premium calculation was inherently flawed and was unlikely to be recovered in full at detailed assessment.

Mr Suinner’s claim was pitched at one stage as being in the region of £150,000. If damages had been recovered at that level the premium would have been £30,000. A premium that high would have been grossly excessive for an EL claim of this nature and well in excess of equivalent policies available at the time. Further, the Costsupport policy only provided an indemnity of £10,000. If the matter had proceeded to trial the cover would have proved entirely insufficient. Indeed, that is precisely what happened when the Claimant lost at trial on the Defendant’s Part 36 offer. The Defendant’s costs for the relevant post-Part 36 period were claimed in excess of £18,000.

It was argued for the Defendant that the failure to give any reasons for recommending the Costsupport policy was particularly serious in light of the policy that was being recommended. The failure to explain that it would be highly unlikely that the premium would be recovered at much more than a fraction of its full amount, meaning that the Claimant would be liable for the shortfall, and the failure to explain that the level of indemnity was likely to prove insufficient meant that the Claimant was unable to make an informed decision as to the suitability of the policy at the time of entering into the agreement. Reliance was placed on the following passage from Garrett v Halton Borough Council [2006] EWCA Civ 1017:

“101. At para 90 of Hollins v Russell, the court recorded the submission of Mr Drabble that the statutory regulation had two distinct aims. The second, he submitted, was “to protect the client – to ensure so far as possible that she understands what she is letting herself in for and is able to make an informed choice amongst the funding options available to her”. The court seems to have accepted this submission. We certainly would. In our judgment, by informing Ms Garrett that they were on the Ainsworth panel, the Websters representative did not disclose the real financial interest they had in recommending the NIG policy.”

As such, it was clear that not only had there been a breach of the Regulations but that such a breach was material. The Court accepted these submissions and all the Claimant’s costs incurred under the CFA were disallowed (having been claimed at over £10,000).

Brady v Rec-Tech Leisure Ltd

In the case of Brady v Rec-Tech Leisure Ltd (Tunbridge Wells County Court, 24/4/07), the Claimant, through her litigation friend, instructed Branton Edwards solicitors (now Branton Bridge) to act under a CFA. The case had been referred to Branton Edwards through Result Management Ltd (Result), a claims management company. The CFA recommended that the Claimant obtain an ATE policy with NIG or IOMA. The CFA stated that Branton Edwards had no interest in recommending the policy. In fact, the policy that was being recommended was issued by Result with the insurers being either NIG or IOMA. In a covering letter sent to the Claimant’s litigation friend the following information was provided:

“Result

Please note that Tim Branton and David Edwards who are Partners in the firm of Branton Edwards have a financial interest in Result Management Limited. We confirm that Branton Edwards receives no financial benefit from the arrangements for the funding and insurance of you case.”

During the detailed assessment proceedings it emerged that the two partners, at the relevant time, each owned 50% of Result and that for each policy issued Result received a commission of £300 out of a premium of £900. Branton Edwards was the only firm who received referrals from Result. There were no other “panel” members.

It was argued for the Defendant that in truth the solicitors did have a financial interest by virtue of the commission payments received by Result, which in turn was owned by the partners, and by virtue of the fact that the firm had a financial interest in the success of Result to ensure the continued stream of referrals. It was further argued that the information given to the Claimant’s litigation friend failed to properly advise of these interests as required by Regulation 4(2)(e)(ii) (see above). The litigation friend was not properly informed of the relationship between NIG/IOMA and Result or of what that interest actually was – the payment of a £300 commission. As such, she was unable to make an informed decision as per paragraph 101 of Garrett.

District Judge Lethem, sitting as Regional Costs Judge, accepted the Defendant’s submissions and ruled the CFA to be invalid resulting in a saving to the Defendant of approximately £20,000. Of wider significance, he accepted the Defendant’s arguments over those of the Claimant in that the Regulations required a claimant to be informed as to what the actual interest was. It was not sufficient to simply inform a claimant whether or not there was an interest. This was the effect of reading Regulation 4(2)(e)(ii) together with 4(2)(e)(i). The requirement to explain why a policy is being recommended (Regulation 4(2)(e)(i)) must therefore include the details of what that interest is under Regulation 4(2)(ii). DJ Lethem accepted that this was the effect of the Court of Appeal’s decision at paragraph 101 of Garrett with the reference to the failure by the solicitors there to “disclose the real financial interest”.

It seems probable that the defective wording used in this case was also used in other CFA cases run by this firm during this period.

These two cases show that successful challenges continue to be available for claims where the old CFA Regulations apply. Although the volume of these claims is reducing over time, the outstanding cases are by their nature likely to be those where the level of costs is relatively high. Such claims are those where a careful consideration of the merits of a technical challenge is most justified. Gibbs Wyatt Stone remains committed to providing its clients with the best possible advice and advocacy in this area of the law.

Excessive Success Fees

A few months ago we reported on the Court of Appeal’s decision in Jones v Caradon Catnic Ltd [2005] EWCA Civ 1821 (see our earlier Costs Law Update) where the Court was faced with a case run under a Collective Conditional Fee Agreement where the solicitors, Thompsons, had prepared a risk assessment seeking a success fee of 120%. This was held to exceed the maximum success fee allowable under the Conditional Fee Agreements Order 2000 and rendered the costs irrecoverable.

In so far as a firm of Thompsons’ size can have failed to understand the rules, it should not come as too much of a surprise to learn that this problem may be more widespread. At Gibbs Wyatt Stone we have recently come across a conditional fee agreement with counsel where a similar error has been made, with the success fee set at 105%. This figure was arrived at with 100% relating to the prospects of success and an additional 5% to reflect the postponement of payment of those fees. There has clearly been a failure to understand that the 100% maximum applies to the total success fee, not simply that part which will be claimed between the parties. The result is that counsel’s CFA is inevitably unenforceable.

We always advise that both solicitors’ and counsels’ CFAs are viewed before costs are agreed to ensure that the agreements are compliant.

Gaynor v Central West London Buses

A recent decision of the Court of Appeal, Gaynor v Central West London Buses Ltd [2006] EWCA Civ 1120, has potentially massive significance in terms of costs recoverability in CFA cases. The decision, followed through to its logical conclusion, appears to be that a claimant cannot enter into a CFA, and thereby recover a success fee, unless and until a defendant disputes the claim. To understand this startling conclusion requires a close analysis of the judgment.

The case concerned an otherwise routine personal injury claim. The issue at the heart of the appeal concerned the retainer letter sent to the client at the outset of the case. The wording of the letter was fairly typical except for the final paragraphs which read:

“Although it is the usual practice of all Solicitors to obtain a payment on account of costs and disbursements in your particular matter we shall not be doing so. If your opponent admits liability his/her insurers will pay your legal costs.

However and where liability is not admitted and you decide to pursue your case further then you may be liable to pay for the cost of medical reports, police reports and other expert reports as are required. If you succeed and recover compensation from your opponent you will be reimbursed your outlay.

If your claim is disputed by your opponent and you wish to pursue your claim through litigation then we will require a payment on account of costs and disbursements. Before requesting any payment we will discuss the alternative methods of funding your case with you. You may have the funds to pay for the cost of litigation. You may wish to enter into a Conditional Fee Agreement with us and apply for after sthe event legal expenses insurance to cover your opponent’s cost in litigation. If you and your partner already have legal expenses insurance, through possibly your household contents policy of insurance, motor car policy of insurance or stand alone before the event legal expenses policy of insurance, tell us and we will assist you in applying to them for cover. In any event and when we next meet please bring along your policies of insurance for us to check through on your behalf.

Were you to meet the cost of litigation from your own funds then we will bill you at regular intervals as your matter progresses and in certain cases we will allow you time for payment of bills or accept an instalment arrangement. Any such arrangement is at the discretion of Mr. Newman.

If your claim is disputed by your opponent and you decide not to pursue your claim then we will not make a charge for the work we have done to date.”

Is was argued for the paying party that the final paragraph created a CFA as defined by section 58(2)(a) of the of the Courts and Legal Services Act 1990:

“a conditional fee agreement is an agreement with a person providing advocacy or litigation services which provides for his fees and expenses, or any part of them, to be payable only in specified circumstances”

and that because the CFA regulations had not been complied with it was therefore invalid and unenforceable.

At first instance the master accepted the Claimant’s submissions that the letter was not a CFA on the basis that there had been no intention to create one. Without such an intention there could be no CFA.

On appeal, the Circuit Judge reversed this decision on the grounds that although there had been no intention to create a CFA the master had asked himself the wrong question. The judge said that, as a result of section 58(2)(a), there are only two kinds of fee agreement: those that fall within section 58(2)(a) and those that fall outside it. There is no scope for a third species of agreement (as was contended on behalf of the Claimant), namely an agreement which, though it appears to fall within section 58(2)(a), in fact falls outside it by reason of a lack of intention to enter into a CFA. He concluded:

“There is no dispute that the terms of the retainer letter in this case do provide for the fees of the solicitor to be payable only in certain circumstances. It must follow that it is a CFA as defined by section 58(2)(a) and in my judgment the learned Costs Judge erred in law in holding that an intention to enter into a CFA was a necessary element of the agreement.”

The decision of the Court of Appeal hinged on the issue of what constitutes a CFA. Dyson LJ, giving the judgment of the Court, rejected the submission that the letter here amounted to an agreement to provide “advocacy or litigation services” as defined by 119(1) of the Courts and Legal Services Act 1990. The central question was whether the work “done to date” referred to in the last paragraph of the retainer letter came within definition of “litigation services” which, for the purposes of 119(1), “means any services which it would be reasonable to expect a person who is…contemplating exercising, a right to conduct litigation in relation to… contemplated proceedings, to provide”. In his judgment:

““contemplated proceedings” are proceedings of which it can be said that there is at least a real likelihood that they will be issued. Until the potential defendant disputes the claim, it is not possible to say that proceedings are contemplated”

This was the dramatic finding in the case which led to the conclusion that the letter was not a CFA. Previously it had been commonly assumed when a client went to a solicitor in relation to a potential claim against a defendant that amounted to “contemplated proceedings” whether or not it was actually necessary to issue proceedings.

The second observation to make is that this interpretation of “contemplated” is directly at odds with the Court of Appeal’s earlier judgment in Callery v Gray [2001] EWCA Civ 1117 There the Court accepted the Law Society’s submissions that an ATE premium should be recoverable where the ATE was purchased at the beginning of a claim and without proceedings ever being issued. This was on the grounds that the ATE was taken out “in contemplation of the commencement of substantive proceedings”. Here the Court had no difficulty in accepting that a claimant could contemplate proceedings before a defendant had disputed the claim.

In Gaynor, the Court has taken a different view. The conclusion that pre-dispute work could not be “litigation services” raises the surprising question as to whether it is therefore possible for pre-dispute work to be subject to a CFA, and therefore attract a success fee. The decision in Gaynor seems to suggest that the answer is “no”. It would also seem to suggest that a CFA could not be entered into at this early stage because there could be no “contemplated proceedings” so early. If this is indeed correct it would have massive implications for claimant solicitors as success fees would not be recoverable in the majority of cases that settle without proceedings being issued and would also not be recoverable for the work done pre-dispute. It would also nullify the effect of CPR 45.11, that allows fixed success fees in Predictable Costs matters, on the basis that such work could not have been subject to a CFA as no “litigation services” can have been provided.

Such a conclusion seems absurd and flies in the face of everyone’s previous understanding of CFAs. It would appear that the Court of Appeal, in an effort to do justice in a case concerning an unusual retainer letter, have created a situation with far reaching consequences. It is almost certain that they did not appreciate the impact of their judgment or, at the very least, they would have been far more explicit in their conclusions. On the other hand, the Court of Appeal has never been asked to rule directly on this particular issue and having now done so for the first time it cannot be said that the decision is not good law.

Another example of how the Court does not seem to have properly considered the impact of its decision in relation to earlier authorities is when it considered the public policy issues. It was Dyson LJ’s view that his approach to the meaning of “litigation services” was consistent with the statutory purpose of protecting clients, as per the decision in Hollins v Russell [2003] EWCA Civ 718. He held:

“The need for that protection is predicated on the assumption that the solicitor will in fact provide litigation or advocacy services. If such services are not provided, the client has no need of protection…A client who, having received limited pre-litigation services, decides not to pursue a claim by litigation has no need for the panoply of protection afforded by the conditions stated in section 58(3) of the 1990 Act”.

However, in Hollins the claim had settled without the need for proceedings in the substantive claim. Nevertheless, the Court had clearly proceeded on the assumption that it was possible to enter into a CFA pre-dispute. If the Gaynor decision is correct then the simple answer to the challenges brought there, and which succeeded in Myatt v National Coal Board [2006] EWCA Civ 1017 which had also settled pre-proceedings, was that the work performed fell outside section 58 and compliance with the regulations was therefore irrelevant.

The Gaynor decision did not clarify what would, for the purposes of the retainer letter, amount to a “dispute”. Did it apply only to liability or did it extend to causation and quantum? The Court did hold that the last paragraph amounted to an offer to “waive modest pre-litigation services” and that the decision must be taken before proceedings were issued. The fact that the Court proceeded on the basis that pre-litigation work is inevitably “modest” suggests somewhat limited experience of current costs matters.

The one possible interpretation of the Gaynor judgment which would avoid the otherwise absurd outcome is that the letter was treated as being a retainer limited to the pre-dispute work and that if the Claimant decided to litigate the claim then a new retainer would be entered into. On the other hand, a traditional CFA is designed to cover both pre and post-litigation work meaning it is valid and legitimate to recover a success fee on all work. Unfortunately this interpretation does not provide an answer as to how it would be possible to enter a CFA at the outset of a claim, in respect of “contemplated proceedings”, if, according to Gaynor, this was a stage where proceedings could not yet be contemplated. Further, the facts in Gaynor do not support this interpretation as proceedings were in fact issued during the claim but no further retainer was entered into. The matter proceeded on the basis of the original retainer letter.

This decision is likely to lead to a considerable period of uncertainty, just when the new CFA regime was meant to bring some certainty to a difficult area. Do not be surprised if this matter needs to return to the Court of Appeal, or indeed the House of Lords, for certainty to be restored.

Garrett v Halton Borough Council and Myatt v National Coal Board

Judgment has been handed down by the Court of Appeal in the long awaited cases of Garrett v Halton Borough Council and Myatt v National Coal Board [2006] EWCA Civ 1017. These cases will have a crucial impact on pre-November 2005 CFAs.

Both cases revolved around interpreting the Court of Appeal’s earlier decision in Hollins v Russell [2003] EWCA 718 and the “materiality” test laid down in that case to determine whether a breach of the Conditional Fee Agreement Regulations 2000 rendered a CFA invalid:

“Has the particular departure from a regulation pursuant to section 58(3)(c) of the 1990 Act or a requirement in section 58, either on its own or in conjunction with any other such departure in this case, had a materially adverse effect either upon the protection afforded to the client or upon the proper administration of justice?”

The Court was required to determine whether the test of “materiality” quoted above requires a court to consider whether the client has suffered actual prejudice as a result of an alleged failure to satisfy the rules. A related question was whether the enforceability of a CFA was to be judged by reference to the circumstances existing at the time when it is entered into, or by reference to the circumstances known to exist at the time when the question arises for decision.

The Court concluded that the “focus on the adverse effect was on the protection afforded to the client, not whether, as a matter of fact, the client had actually suffered any prejudice”. The scheme was “designed to protect clients and to encourage solicitors to comply with detailed statutory requirements which are clearly intended to achieve that purpose”. The “focus of the scheme was on whether the CFA satisfied the applicable conditions, not on the actual consequences of a breach of one of the requirements of the scheme”. Therefore, whether a client has actually suffered prejudice is irrelevant as to whether there has been a material breach of the rules. The time for determining whether there has been a breach is at the date of the CFA and not some later point.

The effect of this conclusion is that where the Court is considering whether there has been a breach of the requirement to consider the availability of alternative funding (Regulation 4(2)(c)) it is irrelevant that the client in fact had no relevant BTE cover. This conclusion matched that of the Senior Costs Judge Master Hurst in Samonini v London General Transport Services Ltd [2005] EWHC 90001 (Costs).

Therefore, in the Myatt case, the Court upheld the decision of the lower court that the CFAs were invalid. The Court agreed that the solicitors had failed to advise the claimants as to whether they already had relevant BTE cover. Although they had asked the clients whether they held BTE cover that would cover their risks in respect of the claims, they were not the kind of litigants who could be expected to be able to properly answer this question themselves. There was thus a breach even though none of the claimants did in fact have BTE cover.

The Court gave some wider guidance as to what would represent proper enquiries to comply with Regulation 4(2)(c). The Court rejected the view that the guidance previously given by the Court of Appeal in Sarwar v Alam [2001] EWCA Civ 1401 should be slavishly followed. In their judgment “the statement at para 45 that a solicitor should normally invite a client to bring to the first interview any relevant policy should be treated with considerable caution. It has no application in high volume low value litigation conducted by solicitors on referral by claims management companies.” There was no rigid code that applied in all cases. The relevant issues included:

• What is reasonably required of a solicitor depends on all the circumstances of the case.
• The more evidently intelligent and knowledgeable about insurance matters the client is the more the solicitor can rely on the answers the client gives as to whether suitable BTE exists.
• The circumstances in which the solicitor is instructed may be relevant to the nature of the enquiries that it is reasonable to expect the solicitor to undertake in order to establish the BTE position. Where the client, for example, is seriously ill in hospital, the enquiries required will be far less onerous.
• The nature of the claim may be relevant. If the claim is one in respect of which it is unlikely that standard insurance policies would provide legal expenses cover, this may be a further reason why it may be reasonable for the solicitor to take fewer steps to ascertain the position than might otherwise be the case.
• The cost of the ATE premium may be a relevant factor. The availability of ATE cover at a modest premium will inevitably restrict the extent to which it will be reasonable for a solicitor’s time to be used in investigating alternative sources of insurance.
• If the claim has been referred to solicitors who are on a panel, it may be relevant that the referring body has already investigated the question of the availability of BTE. Whether it is reasonable to rely on any conclusion already reached will be a matter on which the panel solicitor must exercise his own judgment.
• A solicitor is not required in every case to ask the client who says that he has a home, credit card or motor insurance or is a member of a trade union to send him the policy or trade union membership document.

Although the judgment then went on to discourage defendants from embarking on fishing expeditions in the hope that if they ask enough questions they will be able to show a breach, the vagueness of this guidance is likely to see technical challenges relating to Regulation 4(2)(c) increasing rather than decreasing, but with increasing inconsistency between decisions.

The case of Garrett v Halton Borough Council, concerned a case that was referred to the Claimant’s solicitors by a claims management company called Ashley Ainsworth. The judge on assessment disallowed the entirety of the solicitors’ costs on the grounds that he considered that they had acted in breach of Regulation 4(2)(e)(ii) of the Regulations: in recommending the ATE insurance that they recommended, they had failed to inform the client whether they had an interest in doing so. This was on the basis that although the solicitors had told their client that they were on the panel of Ashley Ainsworth they had failed to inform the client that they thereby had an indirect financial interest in recommending the policy because if they did not they would have their panel membership withdrawn.

The Court of Appeal upheld this decision on the grounds that there was a close relationship between the solicitors and Ashley Ainsworth because the solicitors were dependent on them for referrals of cases. The profit generated by cases was likely to be of greater significance to the solicitors than commissions paid on insurance premiums paid for ATEs in connection with CFAs. The indirect financial interest in maintaining a flow of work through membership of a panel of solicitors was therefore greater than the direct financial interest in commissions paid for insurance premiums. The solicitors had therefore not disclosed to the clients that they had financial interest in remaining on the panel which would be lost if the client did not accept their recommendation that they enter into this specific ATE policy. The client did not know that the solicitors were recommending the policy because this was dictated by their financial interest. Again, this breach was held to be material and the CFA invalid.

This decision is likely to have a significant impact on a large number of other cases as the wording used in relation to the interest in recommending the insurance is similar or the same to that used in a large number of other claims management schemes.

These two decisions, following the Court of Appeal’s earlier decision in Jones v Caradon Catnic Ltd [2005] EWCA Civ 1821 leaves wide open the doors to technical costs challenges by defendants. The scope for significant savings on pre-November 2005 CFAs remains.

Correcting Defective CFAs

Brierley v Prescott – Retrospective CFAs

In Brierley v Prescott [2006] EWHC 90062 (Costs) Master Gordon-Saker was asked to rule on whether an attempt to correct a CFA that was allegedly defective had succeeded as a result of the solicitors and their client entering into a retrospective CFA after the conclusion of the case.

The Master held that this attempt failed as, following Arkin v Borchard Lines Ltd [2001] NLJR 970, an agreement made after the conclusion of the proceedings to vary a CFA relating to those proceedings would be unenforceable as contrary to public policy. Further, the Master doubted that a solicitor could comply with the CFA Regulations 2000 where the proceedings had already concluded and the costs had already been incurred.

Oyston v Royal Bank of Scotland – Deed of Variation

In Oyston v Royal Bank of Scotland [2006] EWHC 90053 (Costs) Master Hurst was asked to consider a CFA where the success fee was stated as being 100% plus £50,000 if the damages recovered exceeded £1 million. It was clear that the CFA was defective in that the success fee exceeded the maximum of 100% and would therefore be unenforceable. However, the claimant’s solicitors had sought to correct this defect by entering into a Deed of Variation with their client to remove the reference to £50,000. Alternatively, they sought severance of the offending words. Again, these attempts to correct the defects in the original CFA failed.

The Master held that the Deed of Variation was ineffective to rectify the situation as against the paying party. By that date the issues between the parties had been resolved. Following the decision of the Privy Council in Kellar v Williams (Appeal No.13 of 2003) [2004] UKPC 30, he held that 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. However, he expressed no view as to what would have been the outcome if the Deed of Variation had been entered into before the conclusion of the case.

Further, the attempt to remedy the problem by severance also failed as it would be contrary to public policy.

As Master Hurst summarised, “If either the Deed of Variation or severance were to be permitted late in the day, this would have the effect of enabling virtually all defective CFAs to be put right late in the day, even if this was only after the paying party had pointed out the alleged defects.”

Brennan v Associated Asphalt Ltd – Deed of Rectification

In Brennan v Associated Asphalt Ltd [2005] EWHC 90052 (Costs), another case heard by Master Hurst, the Court was faced with a CFA which stated that the claimant could not recover from the opponent that part of the success fee which related to postponement of charges and disbursements (“as set out in paragraph (a) and (b) at Schedule 1”). Schedule 1 of the CFA stated that the success fee was 50% and reflected a number of factors including (a) and (b) which related to the postponement elements. However, the agreement did not then specify how much of the success fee was actually attributable to the postponement elements and the defendant therefore argued that this was a breach of Regulation 3(1)(b) of the CFA Regulations 2000.

The Master held that this was indeed a breach of the Regulations. However, he then went on to find that this was not a material breach as, following the Court of Appeal’s decision in Titchband v Hurdman [2003] EWCA Civ 718, “the failure to specify a postponement element means that nothing in respect of this would ever be recoverable from the client”.

However, during the course of the detailed assessment proceedings, once the defendant had raised their concerns in relation to the validity of the CFA, the solicitors and their client entered into a Deed of Rectification. At the hearing before Master Hurst, the claimant did not seek to rely on this document other than as confirmation as to the state of mind of the parties at the time the CFA was entered into. Nevertheless, again on the basis of Kellar v Williams, Master Hurst did express considerable misgiving as to whether a subsequent arrangement made between the solicitor and client, which produced a larger costs bill than the original agreement, would have been effective against the defendant to correct a materially defective CFA. A larger bill would be the inevitable consequence if the original agreement was defective.

The above cases of Brierley, Oyston and Brennan give a very clear indication that attempts to correct defective CFAs, at least when made after the conclusion of the case, are likely to fail regardless of whatever ingenious schemes claimant solicitors may come up with.

Jones v Caradon Catnic Ltd

A success fee set at over 100% represents a material breach of the conditional fee agreement rules declared the Court of Appeal in an important decision that appears not to have received the attention which it clearly deserved.

In the case of Jones v Caradon Catnic Ltd [2005] EWCA Civ 1821 the Court was faced with a case run under a CCFA where the solicitors, Thompsons, had prepared a risk assessment, in June 2001, seeking a success fee of 120%. It was argued for the Defendants that this exceeded the Conditional Fee Agreements Order 2000 and that because it was not compliant with the Order the CCFA was unenforceable.

The Claimant argued that there had been no breach as the CCFA itself stated that the success fee “in no case will be more than 100%” and that this therefore operated over the defective risk assessment. Secondly, even if there were a breach, it was not material as there was no danger of more than 100% being enforced by the courts and therefore there was no prospect of either the client or defendant suffering.

The Court rejected those submissions and found that there was a clear breach of the Order. Because of the operation of the CCFA, the breach would not have an adverse effect on the protection provided to the client. Therefore, the Court’s attention should be devoted to the administration of justice when determining whether the breach was material. It was accepted that the maximum success fee was plainly central to the regime on which lawful CFAs or CCFAs were made. Ignoring this provision, even if the result was that no one was a loser, was inimical to the administration of justice. The CCFA was therefore found to be unenforceable.

The judgment contained some interesting comments concerning the recent changes to the CFA/CCFA regulations. It was recognised that the statutory scheme had now been revoked and that there were no longer any regulations concerned with consumer protection, which was now dealt with by the Law Society’s disciplinary mechanisms. However, so far as the administration of justice was concerned, that side of the statutory scheme has not been revoked and was still in force. Therefore it seems that the same decision would have been reached had the CFA/CCFA been made under the new regime.

This case is worth studying closely due to the evidence that emerged as to how Thompsons’s risk assessments were produced.