England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CARDIFF COUNTY COURT
(HIS HONOUR JUDGE PRICE QC)
(DISTRICT JUDGE REGAN)

		Cardiff Civil Justice Centre Park Street Cardiff
		8th December 2005

1. LORD JUSTICE BROOKE: This is an appeal by the defendants by way of rehearing against an order of Judge Philip Price QC, sitting at Cardiff County Court on 9th February 2005, whereby he dismissed their appeal against the order of District Judge Reagan in the same County Court on 14th July 2004, who had found that the collective conditional fee agreement ("CCFA") deployed by the claimant's solicitors in this action was valid and enforceable.
2. This was a personal injuries action commenced on 4th February 2000 in which the claimant was claiming damages for repetitive strain injury, which culminated in a trial at which an award of just over £50,000 damages was made in his favour on 13th September 2002. There was also an order that the defendants pay the claimants' costs of the action.
3. On 3rd December 2002 the claimants' solicitors gave notice of the commencement of the assessment of their bill of costs. They claimed a success fee of 120 per cent on the item "solicitors' base profit costs". In their points of dispute, the defendants asserted that this fee exceeded the maximum prescribed by the Conditional Fee Agreements Order 2000, and that because it was not compliant with the Order it was irrecoverable in its entirety. Alternatively, it was limited to the maximum prescribed limit of 100 per cent.
4. Despite correspondence from the defendants' solicitors which went unanswered, the claimant did not withdraw the claim for 120 per cent and on 9th October 2003 District Judge Earl directed that the issue of the validity of the CCFA be tried on the preliminary issue on the assessment. On 11th November 2003 the claimant's solicitors conceded by letter that the success fee should be limited to 100 per cent.
5. The matter came before District Judge Regan on 31st March 2004 and he gave judgment on 23rd April 2004. He found that there were a number of puzzling features in the documentation proffered by the claimant's solicitors. He therefore directed that they file a witness statement explaining what had happened.
6. On 1st June 2004, Mr Gasson, who is a partner in the claimant's firm of solicitors, made this witness statement. Up until 1st June 2001, Mr Jones had been represented by his firm through an arrangement with his Trade Union on conventional terms. Mr Gasson explained that on 1st June 2001 his firm had entered into a CCFA with Amicus AEEU which was Mr Jones' Trade Union. On 5th June 2001 his firm sent a letter to Mr Jones explaining the effect of this agreement. Mr Gasson explained to Mr Jones that he had hitherto been acting for him at the request of his Union and that technically, like all solicitors' clients, he, Mr Jones, was liable for his legal costs. However, the Union would continue to pay all legal costs for him, provided he continued to satisfy the conditions of the union's Legal Aid scheme, as set out in a document which he enclosed which was called "Conditions of AEEU Legal Aid". He said that this was an important document. He explained that these conditions might differ from and supersede the conditions set out in the application for Legal Aid that Mr Jones had completed.
7. He went on to say that his firm had entered into a CCFA with the Union and had accepted instructions from the Union to continue to pursue Mr Jones' claim under the CCFA. He also told Mr Jones that he had carried out a risk assessment which dealt with the strengths and weaknesses of his claim. Mr Jones could obtain a copy of it if he wished.
8. In his witness statement, Mr Gasson explained that he had made out a handwritten risk assessment on 5th June 2001. The different elements of it totalled 120 per cent. At that time, his firm was operating two separate case management systems around their files and when they moved to a single system the following year, the details of this risk assessment were entered into the computer. A new computer-generated risk assessment was then produced, dated 24th May 2002, this being the day when the information was input into the computer. The different elements of the risk assessment then appeared in the printed form. They again totalled 120 per cent and since the computer programme had a default entry of 100 per cent for the total success fee, Mr Gasson crossed this out and entered a figure of 120 per cent. The firm's costs draftsman then reproduced this figure when the bill of costs was prepared. In that way the oddities which appeared in the document before District Judge Regan were explained.
9. After receiving this witness statement and one on the other side in reply, the District Judge issued a further judgment on 7th July 2004. He accepted what Mr Gasson had told him and confirmed that his firm had indeed prepared and retained a witness statement containing the risk assessment as required by Regulation 5 of the Collective Conditional Fee Agreements 2004 ("the CCFA Regulations") even if the original document had been lost when the information on it was transferred to the computer. He also found that the claimant's solicitors had intended there to be a success fee of 120 per cent. This was not a mathematical or administrative error.
10. He went on to consider the merits of the defendants' contention that the CCFA was unenforceable. They said that there had been a material breach of section 58(4)(a) of the Courts and Legal Services Act 1990, as amended ("the 1990 Act), and Article 4 of the Conditional Fee Agreements Order 2000. The CCFA was therefore unenforceable as against Mr Jones and because the indemnity principle applied, no costs were payable by the defendants in respect of work done under the CCFA.
11. Section 58 of the 1990 Act, so far as is material, provides that:

"(1) A conditional fee agreement which satisfies all the conditions applicable to it by virtue of this section shall not be unenforceable by reason only of its being a conditional fee agreement. Subject to subsection (5) any other conditional fee agreement shall be unenforceable . . .

(3) The following conditions are applicable to every conditional fee agreement:

(a) it must be in writing;

(b) it must not relate to proceedings which cannot be the subject of an enforceable conditional fee agreement; and

(c) it must comply with such requirements (if any) as may be prescribed by the Lord Chancellor.

(4) The following further conditions are applicable to a conditional fee agreement which provides for a success fee . . .

(b) it must state the percentage by which the amount of the fees which would be payable if it were not a conditional fee agreement is to be increased;

(c) that percentage must not exceed the percentage specified in relation to the description of proceedings to which the agreement relates by order made by the Lord Chancellor."

12. Article 4 of the Conditional Fee Agreements Order 2000 had the effect of prescribing, for the purposes of section 58(4)(c) of the 1990 Act, that the percentage stated in the success fee to a CFA must not exceed 100 per cent. Regulation 5(1) of the CCFA Regulations provides that:

"Where a collective conditional fee agreement provides for a success fee, the agreement must provide that when accepting instructions in relation to any specific proceedings, the legal representative must prepare and retain a written statement containing --

(a) his assessment of the probability of the circumstances arising in which the percentage increase will become payable in relation to those proceedings ('the risk assessment');

(b) his assessment of the amount of the percentage increase in relation to those proceedings having regard to the risk assessment; and

(c) the reasons by reference to the risk assessment for setting the percentage increase at that level."

13. The CCFA made between the claimant's solicitors and his Trade Union contained the following provisions:

"(2) This agreement applies to all claims for damages for personal injuries (whether physical or mental) or disease conducted by the solicitors for members in England and Wales including counter-claims and interim disputes where the instructions in respect thereof were first received by the solicitors before, on or after the date of this agreement . . .

(3.2) When accepting instructions under this agreement in relation to a claim, the solicitors must prepare and retain a written statement ('the written statement of the success fee') containing --

(3.2.1) an assessment of the probability of the circumstances arising in which the success fee will become payable in relation to that claim ('the risk assessment');

(3.2.2) an assessment of the amount of the success fee in relation to that claim which in no case will be more than 100 per cent, having regard to the risk assessment; and

(3.2.3) the reasons by reference to the risk assessment for setting the success fee at that level.

(3.3) The solicitors shall comply with their obligations under clauses 3.1 and 3.2 by sending to the member a copy of the conditions of AEEU Legal Aid worded as set out in the document annexed to this agreement or as may be subsequently agreed by the parties to this agreement."

14. I break off there to say that we have been shown a copy of the conditions of AEEU Legal Aid which set out very clearly on page 9, under the heading "Legal costs", the way that the success fee operates. Under the heading "Success fee" it contains this text:

"This is the fee paid to solicitors in addition to their basic charges for agreeing to pursue a claim on the basis that if the claimant lost they will not charge for their work. The success fee is a percentage up to a maximum of 100 per cent of the solicitors' basic charges."

15. I return to the CCFA:

"(7.1) Subject to the following provisions of this clause, the success fee shall be as specified in the written statement of the success fee and shall only apply to work done by or on behalf of the solicitors on or after the date of this agreement.

(7.2) A member is entitled on request to a copy of the written statement of the success fee in relation to his or her claim."

As I have said in para 7 above, on 5th June 2001 the solicitors told Mr Jones he might see a copy of this written statement if he wished.

16. The District Judge observed that the CCFA limited the success fee to 100 per cent by clause 3.2.2 and it was the risk assessment which was wrong and in breach of regulations. He applied the test set out in the judgment of this court in Hollins v Russell [2003] EWCA Civ 718, [2003] 1 WLR 2487 and held that the CCFA was valid and enforceable. On the defendants' first appeal, Judge Price QC reached the same conclusion. He accepted the reasoning of the District Judge in relation to the express limitation on the success fee in clause 3.2 of the CCFA as protection of the Union which entered into the agreement. There was no risk that more than 100 per cent would be enforced by the court. He was entirely satisfied that the terms of CCFA were critical, and errors made thereafter did not alter the agreement or its validity.
17. Smith LJ refused to grant permission for a second appeal, but on 13th July 2005 Tuckey LJ and I were persuaded that we should grant permission on special conditions as to costs. We granted permission because we were told that the defendants' insurers had encountered a good deal of uncertainty as to how courts should deal with alleged breaches of the CCFA Regulations. Some breaches were easy to analyse if there was a drafting error in the agreement itself, but others were more problematical because it was unclear whether one looked at the agreement itself or at the retainer with all its original characteristics which had been created under the CCFA. We directed that the appeal should be by way of rehearing and we saw certain documents, such as the conditions of the AEEU Legal Aid, which had not been before the court below.
18. The claimant's case which found favour with both the courts below is relatively straightforward. As a matter of construction, both of the CCFA and the individual retainer between solicitor and client, the success fee was 100 per cent. As a fall back argument, Mr Morgan QC, who appears for the claimant, contends that if he was wrong about either of these propositions, there was no materially adverse effect such as would render the CCFA unenforceable. On the other hand, Mr Friston, who appears for the defendants, has argued that not only was there a breach of the Regulations but also it was a material breach, and in those circumstances we should apply section 58(1) of the Act and hold that the CCFA was unenforceable.
19. So far as the relationship between the Union, the solicitors and the client was concerned, the Court of Appeal was concerned with this issue in Thornley v Lang [2003] EWCA Civ 1484, [2004] 1 WLR 378. In that case it was being suggested that a collective conditional fee agreement somehow co-existed with a conditional fee agreement and that the Conditional Fee Agreement Regulations were not observed. In paragraph 20 Lord Phillips MR, giving the judgment of the court, said this:

"The agreement under which the Union agreed with their solicitors that they should represent the claimant was a CCFA. For the purposes of these proceedings it is presumed to have been a valid CCFA that complied with the CCFA Regulations. The union so agreed with the authority of the claimant. An alternative view is that he ratified the agreement reached by the Union on his behalf by availing himself of the services of the solicitors. On either footing, the contract pursuant to which he came under liability to pay the solicitors for their services was a CCFA. As such, it was not subject to the CFA Regulations."

20. It follows that we have to look for the agreement between the solicitor and his client, Mr Jones, to the CCFA as implemented (as one of the parties suggested) or triggered off by the statement that this litigation was being carried on henceforth under the umbrella of the CCFA and by the filing and retaining of the risk assessment to which I have referred.
21. The first question which we need to address is whether the statement was in breach of the Act and the Order. Clause 7.1 of the CCFA provides in clear terms:

"Subject to the following provisions of this clause the success fee shall be as specified in the written statement of the success fee."

The concept of the written statement of the success fee comes from clause 3.2. If one looks at the written assessment of the success fee, which was filled in by Mr Gasson on 5th June 2001, that says in unmistakable terms that the total success fee was 120 per cent. As such, it appears, in equally unmistakable terms, to be the success fee within the meaning of clause 7.1 (see para 15 above).

22. Mr Morgan said that it did not work like this. One had to keep clause 3.2.2 in mind when reading the success fee assessment form. Whatever it said in clause 7.1, the statement, as required by the Act and the Order, was a statement on the success fee assessment form, while writing down from 120 to 100 the total which appeared on that success fee assessment form. To some extent, this was a difficult argument to understand because clause 3.2 on which Mr Morgan relied required the written statement to set out the reasons by reference to the risk assessment for setting the success fee at that level, and the reasons are not reasons for setting a success fee at a level of 100 per cent but reasons for setting the success fee at 120 per cent. In my judgment, there was a clear breach of the Act and the Order in having a statement which exceeded 100 per cent.
23. One then turns to the question: Was this a material breach? Mr Morgan relied heavily on two cases which were decided at the time that Hollins v Russell [2003] EWCA Civ 718 [2003] 1 WLR 2487 was decided. One was the case of Hollins v Russell itself and the other was the case of: Tichband v Hurdman. The facts of those two cases and the conclusions which the court reached was set out in the judgment of the court in that case at paragraphs 125 to 135.
24. In Hollins v Russell the CFA ought to have said in terms that basic charges and disbursements, as well as the success fee, were not limited by reference to the damages that might be recovered on behalf of the client. But the CFA in question referred only to the basic charges and disbursements. We said in paragraph 126:

"(126) To fulfil precisely the requirements of the regulations, the CFA should have said in terms that basic charges and disbursements (as well as the success fee) were not limited by reference to the damages which might be recovered on behalf of the client. However, the extract from the CFA in this case continues:

'You are entitled to seek recovery of part or all of our disbursements, basic charges . . . from your opponent. Please see [Law Society Conditions 4 and 6].'.

Law Society Condition 4, accompanying the CFA, says this:

'If you win:

You are then liable to pay all our basic charges, our disbursements and our success fee.'

Law Society Condition 4 then explains that these items can be recovered from the client's opponent unless they are disallowed by the Court. It states that in that event 'you pay the difference'. The same is stated to be the position if the opponent is publicly funded and basic charges and disbursements cannot be recovered for that reason."

We then said that:

"(127) The CFA has to be read as a whole, and when it is so read its meaning is that basic charges and disbursements payable in full and are not limited by reference to damages. This is expressly stated in relation to the success fee and it would clearly have been preferable if it had been so stated in relation to basic charges and disbursements as well, in the part of the agreement set out in paragraph 119 above."

25. But we then asked ourselves whether the particular departure from regulation 2(1)(d) had a materially adverse effect, either on the protection provided for the client by the requirement in question or for the interests of the administration of justice. We were satisfied that the effect of the CFA read as a whole was sufficiently clear and the failure to specify the position did not affect the protection given to the client or the administration of justice to any material degree. We therefore allowed the appeal. That was a very, very minor breach of the Regulation which would have made no difference in the result.
26. The same was the case in Tichband v Hurdman. Quite apart from that particular point, there was an additional point which I described at paragraph 132 as being "as unattractive as it was unmeritorious". One only has to read paragraphs 132, 133 and 134 to see how totally unmeritorious it was. I do not need to refer to the detail of it. Although it was a breach it was clearly a totally immaterial breach and the appeal was therefore allowed in that case too.
27. Mr Morgan relies on the approach of the court in Hollins v Russell as saying that what we ought to do is to have a look at the agreement as a whole, and if we have a look at the agreement as a whole then as between the client and the solicitor there will be no question -- and this was the conclusion arrived at in the court below -- that the client would ever have to pay more than 100 per cent. Clause 3.2.2 sets that out very clearly.
28. However, if one looks more closely into the terms of the agreement, there was never any question of the client ever having to pay this amount himself at all. I need not go into the detail of it, but the different provisions of the agreement which covered the possibility that the client might have to pay anything under any circumstances, were clause 5.5, which showed what happened if the Union terminated or annulled legal assistance to the member, and clause 7.4 and 7.6 which covered a situation in which the amount of the success fee was disallowed on the assessment or when the solicitors agreed a success fee lower than that set out in the written statement of success fee. Again, there was no question of a client having to pay the additional amount.
29. So this was not a case in which our attention should be devoted to consumer protection or client protection. It was a case in which our attention should be devoted, when determining whether the breach was material or not, to the administration of justice. In Hollins v Russell we explained why the Act and the Order and the Regulations had these two pronged purposes. One which was consumer protection, and that part of the statutory scheme has now been revoked and there are no longer regulations concerned with consumer protection: consumer protection issues are now dealt with by the Law Society's disciplinary mechanisms. The other was the administration of justice. That side of the statutory scheme has not been revoked and is still in being by the combination of the Act and the Order which prescribes that the success fee shall not exceed 100 per cent in any circumstances.
30. Mr Friston argued before us that if a solicitor states in an assessment form a success fee over 100 per cent there are risks to the administration of justice. It is possible, he submitted, that a party on the other side might not have an eye on the limit on the statutory scheme, although the senior costs judge, acting as our assessor, advised us that it was highly unlikely. Also, if one had a problem of this kind one ran into the difficulty that there had to be a preliminary issue of the type that we are concerned with in this case which held up the smooth running of the case contrary to the overriding objective and took out the resources of the court unnecessarily. Above all, he submitted that if we were to hold that the breach was immaterial, then the Act and the Order would be to a considerable extent rendered a dead letter because any breach of the provisions of the Order would be, on Mr Morgan's argument, treated as immaterial and there would be no question of any CFA being unenforceable by reason of a breach of the Act and the order.
31. Mr Morgan's arguments were solidly based on the contention that there was no prospect of the client suffering, there was no prospect of the defendants on the other side suffering because they would spot the mistake straight away (although on this occasion his clients did not accept that that claim was limited for a further period of eight months), and in those circumstances we should hold that the breach was immaterial.
32. I prefer Mr Friston's submissions. As he said, this is a provision which is concerned with the proper administration of justice. The Act provides that any agreement which does not comply with the Act and the Order is unlawful and does not come within the umbrella protection of the CFA scheme. This is, on any showing, a more serious breach compared with the trivial breaches set out in the two cases to which I have referred. I would therefore allow the appeal and declare the CCFA in this case unenforceable.
33. LORD JUSTICE LAWS: I adopt with gratitude the account of the facts and relevant law given in the judgment of my Lord Brooke LJ. I agree that this appeal should be allowed for the reasons given by him. I have only a few observations of my own.
34. Hollins v Russell [2003] 1 WLR 2487 demonstrates that any putative departure from the conditions set out in section 58 of the Access to Justice Act 1999 (as amended) must, if it is in fact to constitute a departure so as to render a CFA (here a CCFA) unenforceable, have a materially adverse effect on the protection to be afforded to the client or on the proper administration of justice. That approach must not be allowed to undermine the force of section 58(1). That it does not do so is, with respect, shown by the outcome in Hollins itself. So much is apparent from the relatively marginal nature of the irregularities in, at any rate, the first two Hollins cases which my Lord has described. But I cannot categorise as marginal the failure in the present case to respect the statute.
35. A statement of 120 per cent success fee is a stark departure from the 100 per cent maximum specified in paragraph 4 of the Conditional Fee Agreements Order 2000. That maximum is plainly central to the regime on whose terms the legislature has accepted the legality of CFA. Its being disregarded, even if in the result it could be shown that no-one would be the loser, is inimical to the administration of justice, and in this case is so for the reasons given by my Lord.
36. If we were to treat this violation as marginal, we should, in my judgment, be acting flat against the grain of the legislature's substantial policy objectives attained by section 58(1): that is to confine within the strict levels, specified by rule, the acceptability of costs arrangements of this kind.
37. LORD JUSTICE MAURICE KAY: I agree with both judgments and have nothing to add.

Order: Appeal allowed. Defendant to pay appellants' costs summarily assessed