England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE CCRTF 97/0880 CMS2

Royal Courts of Justice,

Strand, London WC2

Friday, 27th February 1998

B e f o r e :

LORD JUSTICE KENNEDY

LORD JUSTICE MILLETT and

LORD JUSTICE HUTCHISON

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THAI TRADING (A FIRM)

Plaintiffs/Respondents

-v-

MRS MARGERY TAYLOR Defendant

and

MR WILFRID DAVID TAYLOR

(of Taylors Solicitors, Caversham)

Appellant/Appellant

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DR J WILLIAMS (instructed by Messrs Taylors of Caversham, Reading) appeared on behalf of the Appellant Appellant.

THE RESPONDENT PLAINTIFFS MR A BEARD and MR T BEARD (assisted by MR HEAVER, their McKenzie Friend) appeared in person.

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J U D G M E N T

(As Approved by the Court)

(Crown Copyright)

Friday, 27th February 1998

LORD JUSTICE MILLETT:

1 In June 1991 Mrs Taylor ordered a four-poster Thai carved bed from the Plaintiffs for the price of £2,500. She paid a deposit of £1,500. The bed was delivered, but it did not match Mrs Taylor’s expectations. She rejected it and refused to pay anything more. The Plaintiffs brought proceedings in the Reading County Court for the unpaid balance of the purchase price and Mrs Taylor counterclaimed for the return of the money she had paid.

2 The case was a small, run-of-the-mill county court case and should have been disposed of speedily and with relatively little expense. Unfortunately it had a protracted history and involved a number of court appearances, with the result that the present appeal, which relates to Mrs Taylor’s costs, is concerned with a sum which is out of all proportion to the amount originally in issue.

3 Mrs Taylor won her case. The Plaintiffs’ action was dismissed and Mrs Taylor obtained judgment on her counterclaim. The Plaintiffs were ordered to pay Mrs Taylor’s costs up to 22nd March 1993 and from 25th January 1994 with no order as to costs for the intervening period. This reflected the fact that Mrs Taylor had eventually succeeded on a point not taken before the District Judge.

4 In the course of taxation the Plaintiffs challenged the amount claimed to be due from them. Mrs Taylor had paid the disbursements out of her own money and the Plaintiffs did not dispute their liability for these. But they disputed any further liability on the ground that Mrs Taylor was not legally liable to pay her solicitor his profit costs. It is a well settled principle that a successful party who has been awarded his costs can recover by way of indemnity only the costs which he is legally liable to pay to his own solicitor or in the case of disbursements to third parties. The principle was established in Gundry v Sainsbury [1910] 1 KB 645, where the successful party was unable to obtain an order for costs because his solicitor had agreed to act for him without reward.

5 The circumstances which give rise to the allegation that Mrs Taylor was not legally liable to pay her solicitor’s profit costs are as follows. Mrs Taylor’s husband is a solicitor practising under the firm name of Taylors. He is a sole practitioner. Mrs Taylor works for the firm as an accounts clerk. She naturally employed the firm to act for her in the proceedings brought against her, and it represented her throughout the course of the litigation.

6 Mrs Taylor deposed in an affidavit as follows:

“There was no agreement either expressly or by implication between myself and my husband, acting as my solicitor, that he would not render bills to me. Upon the recovery of costs awarded to me they will be dealt with in the same way as with any client recovering costs following litigation and a bill will be raised covering these costs.”

7 The Judge (His Honour Judge Nigel Hague QC) accepted Mrs Taylor’s evidence that there was no express agreement between her and her husband in regard to her costs, but he found that there was an understanding that she would not pay anything if she lost. He said:

“...the commonsense of the matter points strongly to the conclusion that Taylors would only be paid by Mrs Taylor if and to the extent that she won the litigation and could recover the costs from the Plaintiffs. I cannot believe that Taylors intended or expected to be paid if she lost. The notions that in those circumstances Taylors would have billed Mrs Taylor and that she would have paid such a bill (whether out of her own earnings or savings or out of money provided by her husband), thereby increasing Mr Taylor’s profits and his income tax liability, are to my mind fanciful...

“For those reasons, although I reject the Plaintiffs’ first contention that Mrs Taylor was under no obligation to pay Taylors in any circumstances, I accept their second contention. I find that there was an understanding between Taylors and Mrs Taylor that she would not be liable to them for any profit costs except in the event of success in the litigation and an order for costs in her favour, when she would be liable for their normal profit costs.”

8 There is no appeal from this finding, which was based on inference from the primary facts. In my opinion the facts did not warrant the inference that there was any understanding as to Mrs Taylor’s legal liability in respect of costs. To my mind the only legitimate inference was that, while Mrs Taylor’s legal liability for costs was not affected, save in unforeseen circumstances neither party expected Mr Taylor to demand payment or enforce her liability unless she won her case and to the extent that she recovered costs from the Plaintiffs.

9 In a judgment for which I should wish to express my respectful admiration the Judge pointed out that, if the law relating to the recovery of contingent fees be put on one side, the so-called indemnity principle did not avail the Plaintiffs. Even if there was an express agreement that Mr Taylor would be paid his profit costs only if Mrs Taylor won her case, she would still be entitled to be indemnified against a legal liability which had been incurred in the events which had happened. The fact that she would have incurred no liability in a different event which had not happened would not affect this.

10 Had he felt free to do so, the Judge would have held that the agreement between Mrs Taylor and her husband which he had found was entered into was a valid and enforceable agreement. But he reluctantly concluded that he was bound by authority, in particular the decisions of the Divisional Court in British Waterways Board v Norman (1993) 22 HLR 232 and of Garland J in Aratra Potato Co Ltd v Taylor Johnson Garrett [1995] 4 All ER 695, to hold that the agreement, being an agreement for a contingent fee, was contrary to public policy and so void. Those decisions also showed that the consequence was that there was no legal liability on Mrs Taylor to pay Taylors’ profit costs, and hence by virtue of the indemnity principle no liability on the Plaintiffs to pay such costs.

11 The Judge felt the injustice of the result which he was constrained by authority to reach. He subjected the two decisions to which I have referred to respectful criticism, but rightly held that he was bound by them. We are not so bound, and are free to examine the underlying principles afresh.

12 Mrs Taylor has appealed the Judge’s decision, but has no financial interest in the result of the appeal. Accordingly Mr Taylor has been joined as an additional party to the appeal and argument has been presented on his behalf.

13 It should be observed at the outset that there is nothing in the Solicitors Act 1974 which prohibits the charging of contingent fees. Section 59(2) merely provides that nothing in the Act shall give validity to arrangements of the kind there specified. It does not legitimise such arrangements if they are otherwise unlawful, but neither does it make them unlawful if they are otherwise lawful.

14 The Solicitors Practice Rules 1987 by contrast provide that a solicitor engaged in any contentious business shall not enter into any arrangement to receive a contingency fee, that is to say a fee payable only in the event of success in the proceeding. There is now an exception for conditional fee agreements which satisfy the requirements of the Courts and Legal Services Act 1990. Except as there provided, therefore, it is unprofessional conduct for a solicitor to enter into any agreement even for his normal fee where this is dependent on achieving a successful result in litigation. The Plaintiffs placed much reliance on this. But the fact that a professional rule prohibits a particular practice does not of itself make the practice contrary to law: see Picton Jones & Co. v Arcadia Developments Ltd. [1989] 1 EGLR 42. Moreover, the Solicitors Rules are based on a perception of public policy derived from judicial decisions the correctness of which is in question in this appeal.

15 The law governing contingent fees outside the scope of the Courts and Legal Services Act 1990 is derived from the public policy relating to champerty and maintenance. Until 1967 these were both criminal and tortious. Following the recommendation of the Law Commission the Criminal Law Act 1967 provided that they should no longer be either criminal or tortious. Section 14(2) of the Act, however, preserved the rule of the common law that they are contrary to public policy.

16 Maintenance was described by Lord Denning MR in Re Trepca Mines (No. 2) [1963] 1 Ch. 199, 219 as

“improperly stirring up litigation and strife by giving aid to one party to bring or defend a claim without just cause or excuse.”

Champerty was described by Scrutton LJ in Ellis v Torrington [1920] 1 KB 399, 412 as

“...only a particular form of maintenance where the person who maintains takes as a reward a share in the property recovered.”

17 This last formulation does not assume that the maintenance is unlawful. There can be no champerty if there is no maintenance; but there can still be champerty even if the maintenance is not unlawful. The public policy which informs the two doctrines is different and allows for different exceptions. In examining the present scope of the doctrine, it must be remembered that public policy is not static. In recent times the roles of maintenance and champerty have been progressively redefined and narrowed in scope. The current position is stated by the decision of the House of Lords in Giles v Thompson [1994] 1 AC 142, 161.

18 The policy underlying the law of maintenance was described by Fletcher-Moulton LJ in British Cash and Parcel Conveyors Ltd. v Lamson Store Service Co. Ltd. [1908] 1 KB 1006 at 1015 in terms which were approved by Lord Mustill in Giles v Thompson as follows:

“It is directed against wanton and officious intermeddling with the disputes of others in which the [maintainer] has no interest whatever, and where the assistance he renders to one or the other party is without justification or excuse.”

The language and the policy which it describes are redolent of the ethos of an earlier age when litigation was regarded as an evil and recourse to law was discouraged. It rings oddly in our ears today when access to justice is regarded as a fundamental human right which ought to be readily available to all.

19 But even in former times maintenance was permissible when the maintainer had a legitimate interest in the outcome of the suit. This was not confined to cases where he had a financial or commercial interest in the result. It extended to other cases where social, family or other ties justified the maintainer in supporting the litigation. In Neville v London Express Newspaper Ltd. [1919] AC 368 at p. 389 Lord Haldane said:

“Such an interest is held to be possessed when in litigation a master assists his servant, or a servant his master, or help is given to an heir, or a near relative, or to a poor man out of charity, to maintain a right which he might otherwise lose.”

In Bradlaugh v Newdegate (1883) 11 QBD 1 at p. 11 Lord Coleridge CJ spoke of

“...the interest which consanguinity or affinity to the suitor give to the man who aids him, or the interest which arises from the connection of the parties, eg. as master and servant....”

In Condliffe v Hislop [1996] 1 WLR 753 this Court held that it was not unlawful for a mother to provide limited funds to finance her bankrupt son’s action for defamation.

20 In the present case the Plaintiffs do not contend that Mr Taylor was guilty of unlawfully maintaining his wife’s suit. He was doubly justified in doing so; the suitor was both his wife and his employee.

21 In Giles v Thompson Lord Mustill cited with approval Fletcher-Moulton LJ’s description of maintenance to which I have already referred, and added:

“This was a description of maintenance. For champerty there must be added the notion of a division of the spoils.”

22 The public policy which underlies the doctrine of champerty was described by Lord Denning MR in Re Trepca Mines Ltd. (No.2) at pp. 219-20:

“The reason why the common law condemns champerty is because of the abuses to which it may give rise. The common law fears that the champertous maintainer might be tempted, for his own personal gain, to inflame the damages, to suppress evidence, or even to suborn witnesses.”

Describing champerty as “a particularly obnoxious form of maintenance” in Trendtex Trading v Credit Suisse [1980] 1 QB 629,654, Lord Denning reserved his particular condemnation for the lawyer who charged a contingency fee, that is to say, a fee which would be payable only if his client was successful. He said:

“[Champerty] exists when the maintainer seeks to make a profit out of another man’s action - by taking the proceeds of it, or a part of them, for himself. Modern public policy condemns champerty in a lawyer whenever he seeks to recover - not only his proper costs - but also a portion of the damages for himself; or when he conducts a case on the basis that he is to be paid if he wins but not if he loses “(my emphasis).

23 Lord Denning was there repeating what he had said in Wallersteiner v Moir (No.2) [1975] 1 QB 373 at p. 393:

“English law has never sanctioned an agreement by which a lawyer is remunerated on the basis of a “contingency fee”, that is that he gets paid the fee if he wins, but not if he loses. Such an agreement was illegal on the ground that it was the offence of champerty....“

Lord Denning was prepared nevertheless to authorise the plaintiff in a derivative action to enter into a contingency fee agreement, but the other members of the Court (Buckley and Scarman LJJ) thought otherwise. It is, however, clear from the judgments of the majority that they did not have in mind the charging of normal fees contingent on success in the action. Thus Buckley LJ said at p. 402:

“Under a contingency fee agreement the remuneration payable by the client to his lawyer in the event of his success must be higher than it would be if the lawyer were entitled to be remunerated, win or lose: the contingency fee must contain an element of compensation for the risk of having done the work for nothing. It would, it seems to me, be unfair to the opponent of a contingency fee litigant if he were at risk of being ordered to pay higher costs to his opponent in the event of the latter’s success in the action than would be the case if there were no contingency fee agreement.”

24 It is understandable that a contingency fee which entitles the solicitor to a reward over and above his ordinary profit costs if he wins should be condemned as tending to corrupt the administration of justice. There is no reason to suppose that Lord Denning in Trendtex Trading v Credit Suisse or any of the members of the Court in Wallersteiner v Moir had in mind a contingency fee which entitles the solicitor to no more than his ordinary profit costs if he wins. These are subject to taxation and their only vice is that they are more than he will receive if he loses. Such a fee cannot sensibly be described as a “division of the spoils”. The solicitor cannot obtain more than he would without the arrangement and risks obtaining less. On the principle that “the worker is worthy of his hire” I would regard the solicitor who enters into such an arrangement, not as charging a fee if he wins, but rather as agreeing to forego his fee if he loses. I question whether this should be regarded as contrary to public policy today, if indeed it ever was.

25 In British Waterways Board v Norman the solicitors knew that their client was on income support, advised her to bring a private prosecution without suggesting to her that she would have to pay anything towards the costs, and only expected to be paid by her if she was successful and an order for costs was made against the Board. It never occurred to the client that she would have to pay any costs out of her own pocket. The Divisional Court held that the only possible conclusion from these facts was that there was an understanding amounting in law to a contract that the client would not be liable for their costs if she lost the case. This was in the face of evidence which the magistrates accepted that there was no contractual arrangement with the client that the solicitors would not collect costs from her if the case was lost, that there was no question of a contingency fee, and no agreement express or implied that the solicitors would only be paid if successful. I doubt that the Divisional Court was correct to conclude that there was only one possible interpretation of the facts. It is not uncommon for solicitors to take on a case for an impecunious client with a meritorious case, knowing that there is no realistic prospect of recovering their costs from the client if the case is lost, without thereby waiving their legal right to their fees in that event. As every debt collector knows, what is legally recoverable and what is recoverable in practice are not the same.

26 The Divisional Court followed Lord Denning’s indication of the width of the doctrine in Trendtex Trading v Credit Suisse. McCowan LJ explained the rationale at p. 242 as follows:

“To put it in a nutshell, once a lawyer has a personal interest in litigation, his or her objectivity may be affected.”

Tuckey J said that if it was made clear that the client was liable for costs irrespective of the outcome of the proceedings, there could be no objection to the solicitor agreeing that such liability need not be discharged until the outcome of the proceedings was known. At that stage, provided it had not formed the basis of any prior agreement with the client , the solicitor could properly forego his right to be paid to the extent that any of the costs were not recovered from the other party to the proceedings. In the present case the Judge described this conclusion as most unsatisfactory. He pointed out, justifiably in my opinion, that it elevates form above substance, and invites solicitors to produce documents evidencing an agreement which both parties know would not be enforced. I agree with the Judge’s comment that the need for solicitors to engage in a subterfuge of this kind in order to recover their costs in the event of a successful outcome to the litigation shows that the underlying reasoning is unsound.

27 In Aratra Potato Co. Ltd v Taylor Johnson Garrett [1995] 4 All ER 695 the absurdities to which such reasoning is capable of leading were dramatically exposed. Solicitors were engaged on a retainer which included a term that there would be a 20% reduction from solicitor/client costs for any lost cases. Garland J held that it was champertous and contrary to public policy for solicitors to agree a differential fee dependent on the outcome of litigation; that the entire retainer was unlawful; and accordingly the solicitors could not recover their outstanding fees for work done irrespective of the outcome of the cases and with or without the reduction. The fact that the solicitors were seeking to recover no more (and in respect of lost cases less) than their ordinary profit costs made no difference.

28 If this is the law then something has gone badly wrong. It is time to step back and consider the matter afresh in the light of modern conditions. I start with three propositions. First, if it is contrary to public policy for a lawyer to have a financial interest in the outcome of a suit this is because (and only because) of the temptations to which it exposes him. At best he may lose his professional objectivity; at worst he may be persuaded to attempt to pervert the course of justice. Secondly, there is nothing improper in a lawyer acting in a case for a meritorious client who to his knowledge cannot afford to pay his costs if the case is lost: see Singh v Observer Ltd. (Note) [1989] 3 All ER 777; A Ltd v B Ltd [1996] Ch.D. 665. Not only is this not improper; it is in accordance with current notions of the public interest that he should do so. Thirdly, if the temptation to win at all costs is present at all, it is present whether or not the lawyer has formally waived his fees if he loses. It arises from his knowledge that in practice he will not be paid unless he wins. In my judgment the reasoning in the British Waterways Board v Norman is unsound.

29 Accordingly, either it is improper for a solicitor to act in litigation for a meritorious client who cannot afford to pay him if he loses, or it is not improper for a solicitor to agree to act on the basis that he is to be paid his ordinary costs if he wins but not if he loses. I have no hesitation in concluding that the second of these propositions represents the current state of the law.

30 I reach this conclusion for several reasons. In the first place, I do not understand why it is assumed that the effect of the arrangement being unlawful is that the solicitor is unable to recover his proper costs in any circumstances. Where the solicitor contracts for a reward over and above his proper fees if he wins, it may well be that the whole retainer is unlawful and the solicitor can recover nothing. But where he contracts for no more than his proper fees if he wins, this result does not follow. There is nothing unlawful in the retainer or in the client’s obligation to pay the solicitor’s proper costs if he wins the case. If there is anything unlawful, it is in the waiver or reduction of the fees if he loses. On ordinary principles the result of holding this to be unlawful is that the client is liable for the solicitor’s proper costs even if he loses the case. I regard Aratra Potato Co. Ltd. v Taylor as wrongly decided.

31 In the second place, it is in my judgment fanciful to suppose that a solicitor will be tempted to compromise his professional integrity because he will be unable to recover his ordinary profit costs in a small case if the case is lost. Solicitors are accustomed to withstand far greater incentives to impropriety than this. The solicitor who acts for a multinational company in a heavy commercial action knows that if he loses the case his client may take his business elsewhere. In the present case, Mr Taylor had more at stake than his profit costs if he lost. His client was his wife; desire for domestic harmony alone must have provided a powerful incentive to win.

32 Current attitudes to these questions are exemplified by the passage into law of the Courts and Legal Services Act 1990. This shows that the fear that lawyers may be tempted by having a financial incentive in the outcome of litigation to act improperly is exaggerated, and that there is a countervailing public policy in making justice readily accessible to persons of modest means. Legislation was needed to authorise the increase in the lawyer’s reward over and above his ordinary profit costs. It by no means follows that it was needed to legitimise the long-standing practice of solicitors to act for meritorious clients without means, and it is in the public interest that they should continue to do so. I observe that the author of Cook on Costs (2d. Ed) at p. 341 expresses his doubt that it is now against public policy for a solicitor to agree with a client that he will not charge a fee unless a particular result is achieved. I agree with him and would hold that it is not.

In my judgment there is nothing unlawful in a solicitor acting for a party to litigation to agree to forego all or part of his fee if he loses, provided that he does not seek to recover more than his ordinary profit costs and disbursements if he wins. I would accordingly overrule the decisions in British Waterways Board v Norman and Aratra Potato Co. Ltd. v Taylor Johnson Garrett and allow the appeal.

LORD JUSTICE HUTCHISON: I agree that this appeal should be allowed for the reasons that Lord Justice Millett has given, with which I am in complete agreement.

LORD JUSTICE KENNEDY: I also agree.

Order: appeal allowed with costs.