England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CAMBRIDGE COUNTY COURT
(His Honour Judge O'Brien)
Claim No.CB303122

		Royal Courts of Justice Strand, London, WC2A 2LL
		19 December 2008

Lord Justice Moore-Bick:

1. This appeal raises an interesting and important question relating to the assessment of the appropriate uplift on base costs payable under a conditional fee agreement entered into between the claimant and her solicitor at a time when the defendant had already admitted liability.
2. On 29^th July 2000 the claimant, Mrs. C, was a passenger in a car being driven by her brother, Mr. W. He lost control of the vehicle causing it to leave the road and crash into a tree. No pedestrian, animal or other vehicle was involved. Mrs. C was thrown from the car and suffered serious injuries, including an injury to her head. She instructed solicitors to pursue a claim on her behalf and on 19^th February 2001 the defendant's insurers admitted liability on his behalf.
3. Shortly afterwards Mrs. C instructed a new firm of solicitors, Taylor Vinters, with whom on 18^th May 2001 she entered into a conditional fee agreement ("CFA"). That agreement provided for an uplift on base costs, or success fee, of 98%, of which 15% represented the cost of funding. Proceedings were issued in July 2003. The defendant raised the issue of contributory negligence, asserting that Mrs. C had failed to wear a seat belt and had allowed herself to be driven by a person who was unfit to drive through drink. In the event, however, neither of those allegations was persisted in. However, during the course of the proceedings two unforeseen circumstances came to light that were relevant to the quantum of the claim. The first was that evidence emerged which tended to suggest that some of the damage to Mrs. C's brain might have been caused by excessive consumption of alcohol and therefore pre-dated the accident. The second was the development of breast cancer with its consequent implications for her life expectancy and thus the amount required for her future care. In due course the claim was settled in the sum of £680,000 and costs, the base costs subsequently being agreed at £92,500 plus VAT.
4. The only remaining issue between the parties was Mrs. C's solicitors' success fee. On a detailed assessment the District Judge allowed a success fee of 70%. On appeal His Honour Judge O'Brien reduced it to 50%. The defendant now appeals against that decision on the grounds that even that reduced rate was too high. He (or rather his insurers, who will have to pay Mrs. C's recoverable costs) say that a success fee of 20%, and certainly not more than 30%, is appropriate in this case.
5. It is convenient to begin by referring briefly to the legislative provisions that governed CFAs at the time when the parties entered into the agreement in May 2001. Section 58 of the Courts and Legal Services Act 1990, as amended by section 27(1) of the Access to Justice Act 1999, provided as follows:

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

(2) For the purposes of this section

(a) 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

(b) a conditional fee agreement provides for a success fee if it provides for the amount of any fees to which it applies to be increased, in specified circumstances, above the amount which would be payable if it were not payable only in specified circumstances."

6. The material parts of the Conditional Fee Agreements Regulations 2000 ("the CFA 2000 Regulations") provided as follows:

"2(1) A conditional fee agreement must specify

(a) . . .

(b) the circumstances in which the legal representative's fees and expenses, or part of them, are payable,

. . . . . . . . . .

3(1) A conditional fee agreement which provides for a success fee

(a) must briefly specify the reasons for setting the percentage increase at the level stated in the agreement, . . .

(2) If the agreement relates to court proceedings, it must provide that where the percentage increase becomes payable as a result of those proceedings, then

(a) . . .

(b) if

(i) any such fees are assessed, and

(ii) any amount in respect of the percentage increase is disallowed on the assessment on the ground that the level at which the increase was set was unreasonable in view of facts which were or should have been known to the legal representative at the time it was set,

that that amount ceases to be payable under the agreement, unless the court is satisfied that it should continue to be so payable . . ."

7. The CFA between Mrs. C and Taylor Vinters was modelled on the Law Society's then standard form of agreement, but contained one clause of particular importance, clause 5, which provided as follows:

"5 What happens if you win at Court but fail to beat an offer of settlement or payment into Court?

If we advise you to reject an offer of settlement or payment into court and the case goes ahead to trial where you are awarded damages which are equal to or less than the offer or payment in:-

you do not have to pay any of our basic costs or percentage increase for the work done after we receive notice of the offer or payment in;"

8. It was common ground that the purpose of a success fee under a CFA is to compensate solicitors for the risk of failing to recover any fee at all. However, that does not mean that they can charge, and subsequently recover if successful, whatever success fee their client is prepared to agree, because it is subject to assessment under CPR Part 44 (insofar as it is payable by the opposing party) and paragraph 11.8(1) of the Costs Practice Direction makes it clear that in deciding whether a success fee is reasonable one of the principal factors to be taken into account (normally the most significant) is the risk that the circumstances in which the costs, fees or expenses would be payable might or might not occur. Moreover, if part of it is disallowed, paragraph 3(2)(b) of the CFA 2000 Regulations normally precludes its recovery from the client. Accordingly, it was accepted that the success fee must reflect a reasonable and rational assessment of the risks facing the solicitor at the time when the agreement was entered into. Paragraph 11.7 of the Costs Practice Direction makes it clear that when the Costs Judge is assessing the reasonableness of a success fee on a detailed assessment, he cannot take advantage of hindsight but must have regard to the facts and circumstances as they reasonably appeared to the solicitor at the time of entering into the agreement.
9. Attached to the CFA was a document described as a "Percentage Increase Explanation Form" which provides a clear insight into the way in which Taylor Vinters calculated the success fee in this case. From it one can see that they identified four main factors to be considered: the chances of success, the existence of additional or complicating factors, opportunities to reduce the risk and the cost of funding the claim. Under the heading "Chances of Success" they noted that the uncertainties of litigation are such that no case has a 100% chance of success and that in addition to the usual risks there was the added risk in this case that a failure to accept, on advice, a Part 36 offer or payment might result in the solicitors' not being paid. Taking into account those factors they assessed the chance of success at 75%, giving a success fee of 33%. Under the general heading "Additional or complicating factors" they considered a variety of matters which in their view might affect the overall risk. They regarded the size of the claim as one such factor, on the grounds that large claims usually involve more work, for which they added 20% to the success fee. They were not then aware of any medical history that might affect the risk, so they added nothing for that, but they did add a further 20% in respect of a possible finding of contributory negligence. Under the same heading they also added a further 10% because of what were described as "Unidentified defendant or insurance issues". They could identify no opportunities to reduce the risks attaching to the claim. That brought the success fee up to 83%, to which they added 15% to cover the cost of funding the proceedings, making 98% in all.
10. The principal ground on which Mr. Morgan Q.C. challenged the calculation of the success fee was that the defendant had already admitted liability at the time the CFA was entered into. In those circumstances, he submitted, there was no significant risk that Mrs. C would fail to recover substantial damages in respect of her injuries, even if she were found partly to blame. Accordingly, it was wrong to approach the assessment of risk, and thus the calculation of the success fee, in the way that would have been appropriate if liability had been in doubt.
11. Mr. Post submitted that having regard to the factors which had to be taken into account in calculating a reasonable success fee in this case, the judge's decision was well within the ambit of his discretion. Indeed, he went so far as to submit that that, far from being too generous to the claimant, the judge ought to have assessed the success fee in this case at 60%, having regard to two additional factors which he said the judge had not taken into account, namely, the risk that Mrs. C might not pursue the claim to a conclusion and the risk that in those circumstances Taylor Vinters would not be able to recover their fees and would also be responsible for counsel's fees. In the court below the claimant's representative had conceded that no account could be taken of the risk that a client might not pursue the claim, but Mr. Post asked to be allowed to withdraw that concession and in the absence of any opposition from Mr. Morgan we allowed him to do so.
12. In my view there is much force in Mr. Morgan's argument. The CFA itself speaks of "winning" and "losing", "winning" being defined in terms which include any situation in which the claimant is successful in recovering damages from his opponent and "losing" as meaning a failure to recover because the claim has been lost or terminated on advice prior to trial. The table used by Taylor Vinters to calculate the basic success fee, which is set out in the explanation form, is therefore based on two related assumptions: (a) that there is a quantifiable risk that the claimant will lose the case altogether, but (b) that if the claimant recovers anything by way of damages the case has been won. Thus, if there is a 75% chance of success, the table shows that a success fee of 33% is appropriate, reflecting the one in four chance that the claim will fail and the solicitor will recover nothing in respect of his work. The principle holds good even if the damages are reduced for some reason attributable to the claimant, such as a finding of contributory negligence: provided the claimant recovers damages the case has been won and the success fee is payable. The table itself (which is purely arithmetical in nature) correctly reflects the success fees referable to the risks of losing, in the sense just indicated, but for obvious reasons it calls for careful application in a case where the defendant has already admitted liability.
13. In the present case Taylor Vinters began their calculation of the success fee by assessing the chances of success in general. The explanation form recites that for a variety of well-understood reasons no case ever has a 100% chance of success and states that they assess the maximum chance of success in the most straightforward of cases at 80%. Although one of the risks to which they refer is that of failing to beat a Part 36 offer, the main risks to which they draw attention and the table which they use to calculate the basic success fee make it clear that what they are seeking to identify at that point is the risk of complete failure.
14. It was at this point that the exercise went badly wrong in the present case. In the absence of any evidence that the accident had been caused by anything other than negligence on the part of the driver and in the light of the fact that his insurers had already admitted liability on his behalf, it is difficult to see how Mrs. C could have failed to recover substantial damages given the serious nature of her injuries. Mr. Post submitted that the defendant might have applied to withdraw the admission and contest liability, but that was little more than a theoretical possibility in the absence of some evidence to suggest that the accident occurred without any fault on his part. It follows that the chance of success in this case was very high and the risk of losing correspondingly low – certainly no more than 5% and probably rather less. Applying the ready-reckoner, that would give a basic success fee of at most 5% rather than the 33% calculated by Taylor Vinters.
15. To add a further 20% success fee to reflect the size of the claim was, in my view, also wrong. It is probably true in general that high value claims tend to be more complex and to involve a greater amount of work than claims of lower value, but that does not of itself increase the risk of losing. If more work is done the base fees are inevitably higher, but the application of a percentage success fee means that the amount recovered by the solicitor if the claim succeeds is correspondingly greater. It may be the case that the more complex the litigation, the larger the number of potential pitfalls, but the right way to allow for that is to adjust the chance of success and by that means the success fee. To make a direct increase in the success fee itself is likely to distort the calculation. In the present case, for example, increasing the success fee by 20% was equivalent to reducing the chance of success from 75% to about 66%. In fact, however, the size of Mrs. C's claim was likely to make little, if any, difference to the chance of her recovering a substantial award of damages.
16. A further 10% was added to the success fee in respect of unidentified defendants and insurance issues. Again, it is difficult to see how that increase can be justified in the particular circumstances of this case, since the driver's identity was known, and his insurers had admitted liability on his behalf. There was a theoretical possibility that the insurers might find some grounds for avoiding liability, but I think it was remote and if that had happened Mrs. C would have been able to make a claim against the Motor Insurers Bureau. The table shows that the addition of a further 10% success fee was equivalent to reducing the chance of success to 61.5%.
17. The real difficulty in this case lay in clause 5 and in assessing the risk that the solicitors might lose the right to recover part of their fees as a result of Mrs. C's failure to beat a Part 36 offer which she had rejected on their advice. Given that the CFA was entered into before proceedings had been commenced, that called for an analysis of several contingencies, each of which was difficult to assess individually, and which together made the task almost impossible. They included the chance that a Part 36 offer would be made, the chances that it would be made at an earlier or later stage in the proceedings, the chance that they would advise Mrs. C to reject it, the chance that she would accept their advice and the chance that, having rejected the offer, she would fail to beat it at trial. Some of these might be assessed with a degree of confidence: for example, one could confidently predict in a case of this kind that a Part 36 offer would be made at some stage. One might also predict, though perhaps not with quite the same degree of confidence, that Mrs. C would reject such an offer if her solicitors advised her to do so. The timing of an offer was more difficult to predict, but was potentially of some importance because only fees earned by the solicitors after its rejection would be at risk; fees earned up to that point would be secure. The chance that Taylor Vinters would advise Mrs. C to reject an offer which she subsequently failed to beat at trial is difficult to assess, but one would not expect highly experienced solicitors practising in this field to differ very widely in their assessment of the bracket in which an award would be likely to fall, provided they had access to the same information. That would include access to any evidence of contributory negligence which, if established, would reduce the amount of the award. The task facing Taylor Vinters in May 2001 was to assess, as best they could, the risk of losing part of their fees for reasons of that kind, and then expressing that as a percentage of the total fees likely to be earned to trial. Only by doing so could they calculate a success fee expressed as a percentage uplift on the whole of their profit costs. However, the explanation form shows that they did not attempt to grapple with that task and indeed I doubt whether they had the means of doing so in any reliable way.
18. Considerations of that kind prompted the court in the course of argument to raise the question whether it can ever be reasonable for solicitors to enter into a CFA when first instructed in a case where liability has been admitted. It must be borne in mind, however, that the legislation does no more than render it lawful to enter into an agreement for litigation services which provides for fees to be paid only in specified circumstances. The legislation does not define what those specified circumstances may be or how the success fee may be calculated; those are matters which are left to the parties. However, when it comes to the detailed assessment of costs the receiving party must normally be able to justify as reasonable any success fee he seeks to recover from the paying party. In my view the Costs Judge cannot refuse to award a success fee simply on the grounds that the difficulty of assessing the risks made it unreasonable to enter into a CFA at all; but if the receiving party cannot show that the success fee has been calculated in a way which reasonably reflects the risks that have been assumed, he will not be able to satisfy the Costs Judge that it is recoverable. Having said that, I should make it clear that there is nothing unreasonable in my view in entering into a simple CFA at a time when liability has been admitted provided that the parties make a proper assessment of the inevitably much reduced risk of failure.
19. The judge below identified the main complicating factor in the present case as being the allegation of contributory negligence and the risk that a Part 36 offer rejected on the advice of Taylor Vinters might not be beaten at trial. He was right to accept that it was a factor that had to be taken into account in assessing the success fee and he attributed to it a risk of 20%. In doing so he noted that although a 20% risk was not the same as the 20% percentage increase in the success fee that was being claimed by Taylor Vinters for these factors, "it does seem that the figures are almost together at that point." He then allowed a further 10% in respect of the general hazards of litigation and another 3% to reflect the additional risks inherent in the size of the claim, making 33% in all. That meant that he thought that there was a one in three chance of losing, so giving rise to a 50% success fee.
20. Although the judge recognised that this was a case in which the chance of failure in the conventional sense was minimal, he failed to keep a clear eye on the true nature of the risks which Taylor Vinters were undertaking and what constituted success and failure. That led him to treat the risk of failing to beat a Part 36 offer as if it represented a 20% risk of failing to recover any damages at all, as his reference to the relevant uplift, clearly drawn from the ready-reckoner table, shows. (It is not clear that he appreciated or took into account at all the fact that, depending on the stage at which any offer might be made, a significant proportion of the solicitors' profit costs and success fee might not be at risk for practical purposes.) He then compounded the error by adding a further 10% for the chances of litigation. It is true, of course, that there are risks inherent in every aspect of litigation and it is always possible that where contributory negligence is in issue the claimant's case may be adversely affected by, for example, an unforeseen turn in the evidence. Nonetheless, to treat it as involving a 10% risk of the claim as a whole failing was wrong. At best it increased the risk attributable to the failure to beat a Part 36 offer to that extent. Similarly, the additional risk inherent in the size of the claim (which he assessed at 3%) should have been applied to the basic risk of failing to beat a Part 36 offer. So, instead of basing his calculation on an overall risk of losing of about 23%, which would have led to a success fee of 30%, he based himself on a risk of 33%, which led to a success fee of 50%. In those circumstances his decision must, in my view, be set aside.
21. In the light of the concession to which I referred earlier the judge did not make any allowance for the risk that Mrs. C might not pursue the claim to a conclusion. In my view there are two reasons why it would have been wrong for him to do so. The first is concerned with the nature of the agreement itself. The foundation of Mr. Post's argument was that if a claimant for whom a solicitor is acting under a CFA decides not to pursue the claim, there are unlikely to be any funds available from which the solicitor can hope to obtain payment of his profit costs and disbursements. In effect, the solicitor is at risk of recovering nothing. However, that is to treat the solvency of the client as an element in the risk which the solicitor undertakes under a CFA, which is not usually the case. It is usual for a CFA to provide, as it does in this case, that the client may terminate the agreement at any time, but that if he does so before the case has been disposed of by judgment or compromise, the client is liable to pay the solicitor's profit costs and disbursements. As Mr. Morgan pointed out, the legislation providing for CFAs is concerned with arrangements under which the whole or a part of a solicitor's fees become payable only in specified circumstances and are to that extent at risk and the success fee is intended to reflect that risk. The circumstances (and therefore the risk) are invariably related in one way or another to the outcome of the proceedings, not to the client's solvency. Accordingly, unless the agreement were to allow the client to withdraw from the claim without any liability for the solicitor's fees or disbursements (which is not the case here), I do not think that the risk of his deciding not to pursue the claim can justify any increase in the success fee.
22. The second reason why it would have been wrong for the judge to take into account such a risk in this case is that there was in reality very little, if any, chance that Mrs. C would abandon her claim having regard to the severity of her injuries and the admission of liability.
23. As I have already said, the real difficulty in a case of this kind lies in assessing the risk of the solicitors' failing to recover part of their fees as a result of the client's failure to beat a Part 36 offer at trial and in translating that into a risk of failure in the action so that the resulting success fee can properly be applied to their profit costs of the whole proceedings. That involves the analysis and assessment of a number of different risks which interact with each other and I doubt very much whether any solicitors are well placed to undertake it. The best they can hope to do, in my view, is to make a broad assessment based on their own experience. Provided the resulting success fee falls within a reasonable bracket, however, I should not expect the costs judge to reject it.
24. The judge took as his starting point the uplift of 20% which Taylor Vinters had used in their explanatory document to allow for the issue of contributory negligence. As he pointed out, that was not in fact an assessment of risk; as the ready-reckoner table shows, a success fee of 20% reflects a 17% risk of losing altogether. For the reasons I have given, I am not satisfied that that is a fair reflection of the risk Taylor Vinters had assumed. There is no doubt that they had assumed a risk of some kind, but in the circumstances I am not persuaded that it was equivalent to more than a 15% risk of failure overall. I would not myself add much for the general risks of litigation since they must be taken to have been subsumed in the basic assessment, but in any event to increase the risk by a factor of 10% would add little. Again, I would not add anything significant for the size of the claim, nor, for the reasons I have already given, would I make any allowance for the risk that Mrs. C might decide not to pursue the claim. However, taking all these factors into account I should be prepared to accept that a reasonable assessment of the risk in overall terms would be 17%. That would lead to a success fee of 20% which I think is fair in the circumstances of this case. I would therefore allow the appeal and substitute for the judge's order an order that the success fee in this case be assessed at 20%.
25. The problem which this appeal raises will only arise in cases where solicitors offer to enter into a CFA which includes a term similar or identical to clause 5 in the present case and the claim is not one to which sections III to V of CPR Part 45 (fixed percentage increases) apply. However, we were told by Mr. Morgan that a clause similar to clause 5 has been a standard option in the Law Society's model form of CFA since November 2005 and since the Society's model forms are in widespread use, the problem may be far more extensive than at first thought. If in such cases the parties wish to enter into a CFA when solicitors are first instructed and wish at that time to agree a success fee that will relate to the whole of the proceedings, it will be necessary to assess the particular risk to which clause 5, or its equivalent, gives rise. That will be so whether liability is admitted, as in this case, or in dispute. Clause 5 is advantageous to the client, who may well wish to ensure that he obtains at the outset of the litigation an agreement which he knows will see him through to the end, and we were told that it may also be necessary in current market conditions for the client to have entered into a CFA with his solicitor in order to obtain ATE insurance on reasonable, or perhaps any, terms. However, given that the risks associated with clause 5 are so difficult to assess, it would, perhaps, be worth considering whether it would make sense for solicitors who wish to offer it to include in the CFA a variant of the two-stage success fee discussed in Callery v Gray [2001] EWCA Civ 1117, [2001] 1 WLR 2112 in the form of a clause giving them the right to review the success fee once an offer to which the clause applies has been made. Both parties would be sufficiently protected against an excessive increase by the right to require a detailed assessment.

Lord Justice Thomas:

26. I agree.
27. I add a word of my own simply because of the wider issues raised by Mr Jeremy Morgan QC about the way in which CFA schemes in general operate and the difficulties in relation to the market. In the course of his submissions to us, he made very forcible and attractive submissions about the lack of an effective market and paucity of information that existed in relation to such market as there was. It seems to me, however, that powerful though these submissions were, these are issues that need to be considered in a wider context, including the effect that this regime is having on transferring costs to others and the fundamental right of access to justice. They do not arise for decision in this case.
28. The issues before the Court in the present case were much narrower as so clearly emerges from Moore-Bick LJ's judgment. Given the policy approach adopted by the Courts and Legal Services Act 1990 (as amended by the Access to Justice Act 1999), the context of the current overall regime as to costs and clause 5 of the CFA agreement in issue (set out at paragraph 7), the approach set out in Moore-Bick LJ's judgment is unanswerable. It results, however, in the position that in a case where liability is admitted there has to be a success fee that adds to what is already, in the eyes of most people, the very high cost of access to civil justice, a cost which is transferred to the public as a whole in cases of this kind, through the payment of insurance premiums.
29. The judgment demonstrates the real difficulties that face both solicitors and the Court in attempting to fashion a CFA in cases where liability is admitted, given the inter-relationship of the necessity of financing litigation, through a CFA, to enable the claimant to obtain access to justice and the timing of a Part 36 offer which lies in the hands of the defendant insurers. It is clear that for the CFA regime to operate more effectively then much better statistical information must be collected and made available to assist the better assessment of risk; I understand that the Ministry of Justice has commissioned research that will include the provision of hard statistical data.
30. However it is worth, in my view, also considering whether a new regime could be devised for cases where liability is admitted. At paragraph 25, Moore-Bick LJ sets out an analysis of the difficulties and makes some suggestions. Another suggestion might be that the remuneration of the claimant's solicitor be on a standard basis without enhancement up to the making of the Part 36 offer and a regime designed to deal with risk come into play when there is a real risk, namely upon a rejection of a Part 36 offer that was thought to be too low. The risk the clamant would then face (absent a CFA with clause 5) is liability for the costs of the defendant and for the costs of his own solicitor which could be satisfied from the damages. However, it may well be because of the operation of aspects of the CFA market, including ATE insurance, that this is not a solution. No doubt there are other possibilities. However, these are issues which though not for decision by this Court certainly deserve urgent and wider consideration. I would hope the recently commissioned review to be carried out by Jackson LJ will consider this issue and whether change can be effected within the current legislative regime.

Lady Justice Arden:

31. I agree with both judgments.