England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE SUPREME COURT COSTS OFFICE
Deputy Costs Judge Lightman

		Royal Courts of Justice Strand, London, WC2A 2LL
		31/01/2008

Lord Justice Dyson :

1. Yet again, this court is concerned with an issue arising from the conditional fee agreement legislation. The question is whether a collective conditional fee agreement ("the Agreement") dated 22 April 2002 between the claimant and its solicitors, Clarke Willmott and Clarke ("the solicitors"), complied with the requirements of section 58 of the Courts and Legal Services Act 1990 as amended ("the 1990 Act"). It is common ground that the case concerns a collective conditional fee agreement which, by virtue of the Collective Conditional Fee Agreements Regulations 2000, is a conditional fee agreement ("CFA") which must satisfy the requirements of section 58. It is also common ground that, if the success fee provided for by the Agreement exceeds the maximum permitted by section 58(4)(b) and article 4 of the Conditional Fee Agreements Order 2000 ("the 2000 Order"), that would render the agreement unenforceable and no profit costs would be recoverable between solicitor and client and (on the indemnity principle) by the appellant from the respondents: see, for example, Jones v Caradon Catnic [2005] EWCA Civ 1821.
2. So far as material, section 58 provides:

"(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 and section 58A-

(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.

…

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

(a) it must relate to proceedings of a description specified by order made by the Lord Chancellor;

(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; and

(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."

3. The maximum success fee permitted by section 58(4)(c) and article 4 of the 2000 Order was 100%.
4. The solicitors were originally instructed to act on behalf of the claimant under a traditional contract of retainer dated 12 May 1998. This was superseded by the Agreement. Paragraph 1 of the Agreement provides an "explanation of words used". "Basic charges" are defined as the legal representative's charges for the legal work done on the claimant's claim at the rate of £145 per hour. "Discounted charges" are defined as the legal representative's charges at the rate of £95 per hour if the client "loses". "Success fee" is defined as the "percentage of basic charges which the legal representative adds to the basic charges if the client wins the claim, also referred to as the percentage increase". Paragraph 5 of the Agreement provides that the success fee is set as a percentage of the basic charges and "shall be as set out in the written statement referred to in clause 3a hereof". The percentage as set out in the written statement is 100%. The words "claim", "win" and "lose" are defined in paragraph 1. The detail of these definitions is not material to the appeal. Paragraph 7 provides that "if the client wins (defined in clause 1n) the client is liable to pay the legal representative's basic charges, disbursements and success fee…". Paragraph 8 provides that "if the client loses, the client pays the legal representative's charges calculated [at] the rate of £95 per hour …."
5. The background to this dispute is that the claimant made a claim against the defendants in relation to an undertaking given by the first and second defendants as part of an agreement for the purchase of land by the Council. At a mediation on 3 December 2004, agreement was reached between the Council and the first and fourth defendants whereby the latter were to pay the Council £135,000 and "its costs of the action". The dispute arose in the course of the detailed assessment of these costs.
6. It is not in issue that the Council "won" its claim against the first and fourth defendants within the meaning of the Agreement. On the face of it, therefore, the solicitors were entitled to be reimbursed at the rate of £145 per hour in respect of their basic charges and a success fee of 100% i.e. at the rate of £290 per hour.
7. It is the defendants' case that, in substance, the Agreement rewarded the solicitors for the win with a success fee of 290%, with the consequence that the Agreement is unenforceable. I refer to the argument in more detail below. In outline, Mr Bacon submits that the Agreement provides that the solicitors are to receive the hourly rate of £95 per hour whether the Council wins or loses, but that in the event of a win, the solicitors receive an additional £50 per hour making a total of £145 per hour. The effect of the Agreement, therefore, is that the solicitors are at risk to the extent of no more than £50 per hour if the Council loses a claim. For a risk of £50 per hour, the solicitors are rewarded on success with the sum of £145 per hour in addition to their basic charges at that rate. On a proper interpretation of the Act, it is to the costs at risk that the success fee of £145 per hour (100% of £145) should be applied. It follows that the Agreement provides for a success fee of 290%, does not satisfy the condition in section 58(4)(c) and is, therefore, unenforceable.
8. The deputy costs judge rejected Mr Bacon's submissions. He held that there was no breach of section 58(4)(c) because the success fee, applied to the basic charge of £145 per hour, did not exceed the prescribed maximum of 100%.
9. The issue raised by this appeal is whether, on a proper interpretation of section 58(4)(b), the success fee payable under the Agreement in the event of a win was an increase of 100% or 290% of "the amount of fees which would be payable if [the Agreement] were not a conditional fee agreement". Mr Bacon submits that the amount of fees which would be payable if the Agreement were not a CFA is £50 per hour (the costs at risk). Mr Hutton submits that it is £145 per hour. The issue is one of considerable importance to the solicitors' profession. That is why the Law Society was given permission to intervene in the appeal. We have been assisted by written representations made on its behalf. The Law Society supports Mr Hutton's submissions.
10. In a standard CFA with a success fee, the agreement states that the fee will be £X per hour plus a success fee of Y% in the event that the claim is successful (however success is defined), and that no fee will be charged if the claim is unsuccessful. In such a case, it is easy to see that the amount of the fees which would be payable if the agreement were not a CFA is £X per hour and that the percentage by which that amount will be increased if the claim is successful is Y%.
11. A CFA may provide for a discounted fee in the event of failure. This may or may not be accompanied by a success fee. Where there is no success fee, there is no difficulty. An example would be an agreement which provides for payment at the rate of £100 per hour in the event of success and a rate of £50 in the event of failure. But it is possible to have a CFA (such as in the present case) which provides for a discounted fee in the event of failure and a success fee in the event of success. The question raised by this appeal is what in such a case is the amount of the fees which would be payable if the agreement were not a CFA. The answer to that question determines whether the success fee exceeds the permitted limit of 100%.

The defendants' submissions in more detail

12. Mr Bacon submits that the decision reached by the deputy judge cannot be right since it can produce absurd results. It means that solicitors can enter into CFAs (whether collective or individual agreements) under which they agree to charge their normal hourly rates if the client wins (say £200 per hour), and charge only a slightly lower rate (even £199 per hour) if the client loses, but in addition charge a success fee of 100% of £200 in event of success. On this extreme example, the solicitors will receive £400 per hour if the client wins, although they are only at risk of costs to the extent of £1 per hour if the client loses. It cannot have been intended by Parliament that section 58 could lead to such absurdity.
13. He submits that the whole point of success fees is that they should be set by reference to the risk of the circumstances in which they are payable i.e. the risk of failure. Thus in Callery v Gray (Nos 1 and 2) [2002] UKHL 28, [2002] 1 WLR 2000, at para 69 Lord Scott of Foscote said:

"The logic of the success fee is that its size will reflect the risk the lawyer is incurring in taking on the case. The more difficult the case and the less clear that the outcome will be a successful one, the higher the percentage uplift that can be justified; and, of course, vice versa".

14. Similar observations were also made in para 4 of the opinion of Lord Bingham and para 62 of the judgment of the court given by Lord Woolf CJ in Callery v Gray [2001] EWCA Civ 1117, [2001] 1 WLR 2112.
15. Taking account of this logic and in order to avoid the absurdities which can result from the deputy judge's interpretation, the court should adopt a purposive interpretation of section 58(2)(b) and (4)(b). Such an interpretation requires that the maximum success fee is to be applied to the costs at risk under the CFA and not to the costs not at risk.
16. Adopting a purposive approach, Mr Bacon submits that section 58(2)(b) should be read as follows: "a conditional fee agreement provides for a success fee if it ["it" being the CFA as defined in 58(2)(a)] provides for the amount of any fees to which it [the CFA] applies….to be increased, in specified circumstances, above the amount which would be payable if it [the fees covered by the CFA to which the success fee is applied] were not payable only in specified circumstances".
17. As regards section 58(4)(b), the way in which Mr Bacon puts it in his skeleton argument, as applied to a discounted fee agreement as follows: "the amount of the fees which would be payable if it were not a conditional fee agreement is to be increased" are not all of the costs as they were in the "no win no fee agreement". The amount of the fees "which would be payable" is a direct reference back to s 58(2)(b) and therefore in this context it has to be a reference to the part of the fees that would otherwise be payable. Where the agreement is a discounted fee agreement at say £95 p/h for basic charges if the case is lost and £145 p/h if the case is won (as in the present case) the fee that would be payable but for the agreement being a conditional fee agreement would be £50. The £95 is payable whether or not there had been a conditional fee agreement so the amount of the fee "that would be payable if [it] were not a conditional fee agreement" is £50 in the context of the agreement; put another way, but for the conditional fee term, the £50 would have been payable had it not been the subject of a conditional fee agreement. Therefore, applying s 58(4)(b), it is to the £50 that the success fee has to be calculated".
18. Mr Bacon also submits that absurd and unfair results of the kind to which the deputy costs judge's decision would open the door cannot be avoided at a detailed assessment by applying CPR 44.5 and PD 44 para 11.8 to reduce the success fee in such a case on the grounds that it is unreasonable. That cannot be done for a number of reasons. First, the reasonableness of a success fee can only be judged by reference to the risk of not recovering it, and not by reference to the amount of costs at risk. Secondly, there are important classes of litigation where the success fee is fixed: see CPR 45. Thirdly, there are many cases where the amount of costs payable is settled without a detailed assessment.
19. As an alternative to his submissions on interpretation, Mr Bacon submits that the basic charge that would be payable if the Agreement were not a CFA was no more than £114 per hour. He relies on the finding by the deputy costs judge that "had there been no CCFA, the rate, by the time the litigation concluded, would have been no more than £114".

Discussion

20. I cannot accept Mr Bacon's submissions largely for the reasons given by Mr Hutton. Section 58(2)(b) defines a conditional fee agreement which provides for a success fee. It is not happily drafted. In my view, however, the correct interpretation of this subsection is as follows: "a conditional fee agreement provides for a success fee if it [the CFA] provides for the amount of any fees to which it [the CFA] applies to be increased, in specified circumstances, above the amount which would be payable if it [the amount of fees to which the success fee is applied] were not payable only in specified circumstances".
21. It is true that in a standard CFA of the kind referred to at para 10 above, the amount of any fees which are increased by the success fee is the amount of "costs at risk" (to use Mr Bacon's phrase). But the concept of "costs at risk" does not find expression in section 58(2)(b) and it forms no part of the definition of a CFA which provides for a success fee.
22. The Agreement is a CFA which provides for a success fee within the meaning of section 58(2)(b) because it provides for the basic charges of £145 per hour to be increased in the event of a win. The basic charges of £145 per hour ("the amount of any fee") is a fee to which the Agreement applies and it provides for that fee to be increased in the event of a win (the "specified circumstances") above the amount which would be payable (the basic charges of £145 per hour) if that amount were not payable only in the event of a win.
23. I have considered whether it can also be said that what makes the Agreement a CFA is the provision that, if the client loses, the fee will be based on the discounted charges of £95 per hour. Mr Bacon did not submit that it was this feature of the Agreement (as well as the provision for a success fee in the event of a win) that made the Agreement a CFA. In my judgment, he was right not to do so, since section 58(2)(b) refers to an agreement which provides for the amount of any fees to be increased in the specified circumstances. It is artificial to construe the Agreement as providing for the discounted charges of £95 per hour to be increased to £145 per hour plus the success fee in the specified circumstances of a win and to regard that increase as a success fee within the meaning of section 58(2)(b). The only amount of fees that is to be increased in the specified circumstances of a win is £145 per hour. That is what the Agreement says. It does not say that the amount of £95 per hour is to be increased in those circumstances. The use of the terms "basic charges" and "discounted charges" is revealing.
24. Section 58(3) specifies certain conditions which are applicable to every CFA. Section 58(4) sets out the further conditions which are applicable to a CFA which provides for a success fee. Subsection (b) lies at the heart of the dispute in the present case. It provides that the CFA must state the percentage by which the amount of the fees which would be payable if it were not a CFA is to be increased. Applying the language of section 58(4)(b) to the present case, I consider that the Agreement states 100% as the percentage by which the amount of the fees which would be payable if it were not a CFA (£145 per hour) is to be increased. The Agreement provides for basic charges of £145 per hour. That is the amount of the fees that would be payable if the Agreement were not a CFA. As I have said, what makes the Agreement a CFA which provides for a success fee is the provision that, if the client wins, the amount payable will be £145 plus the success fee. This interpretation of section 58(4)(b) as applied to the Agreement is consistent with the interpretation of section 58(2)(b) that I have given.
25. I cannot accept the submission that the amount of the fee that would be payable if the Agreement were not a CFA is £50. The Agreement provides that the basic charges are £145 per hour. If it were not a CFA, it would not have provided for payment of the success fee on the basic charges if the client won. It would simply have provided for payment of basic charges at £145 per hour. There is no basis for saying that it would have provided for payment of charges at the rate of £50 per hour.
26. Mr Bacon's submission that the CFA must state the percentage increase payable on the difference between the full and discounted hourly rates (the "costs at risk") cannot be derived from the language of section 58(4)(b) any more than it can from (2)(b). It is not possible to construe the words "the amount of the fees which would be payable if it [the Agreement] were not a conditional fee agreement" as "the difference between the full and discounted hourly rates" or "the costs at risk".
27. As I have said, it is correct to say that in a standard CFA the fees which are increased by the success fee in the event of success are the costs at risk. That is because if the claim does not succeed, the legal representative will not recover those (or any) fees. No doubt it was CFAs of that type (and not CFAs which provide for discounted fees in the event of failure) that Lord Scott and Lord Woolf had in mind when they made their observations to which I have referred at paras 13 and 14 above. In my judgment, it is clear that lawfulness of the percentage increase is measured not by reference to the costs at risk, but by reference to the fees that would have been payable if the CFA were not a CFA. The concept of "costs at risk" cannot be extracted from the statute and cannot be invoked to place upon it a meaning that it cannot bear.
28. As for the spectre of abuse raised by Mr Bacon, there are several answers to this. First, I do not accept that, in determining whether the success fee claimed is reasonable, the court is bound only to consider the risk of failure. Para 11.8(1) of PD 44 provides: "In deciding whether a percentage increase is reasonable relevant factors to be taken into account may include- (a) the risk that the circumstances in which the costs, fees or expenses would be payable might or might not occur...". The court must take into account all relevant factors. It is difficult to conceive of a case where the risk of failure would not be a relevant factor. But it is clear that it is not the only relevant factor. In the case of a discounted fee CFA, the court could, and usually would, also have regard to the fact that a reduced level of fees would have been recoverable even if the case had been lost. Thus, if the basic charge was £200 per hour and the discounted charge £199 per hour, in assessing the reasonableness of the fee, the court would be bound to take into account the fact that the solicitor was not at risk, whatever the risk to the client of the claim failing. In the real world, however, a solicitor would surely not offer such terms to his or her client. Quite apart from the question whether such conduct would be regarded as unprofessional by the Law Society, it is most unlikely that the client would agree to retain a solicitor on such a basis. But in the unlikely event that such terms were agreed between solicitor and client, they would have to pass the reasonableness test on a detailed assessment of costs.
29. It is true that costs are often settled without an assessment. But the important point for present purposes is that it is always open to a paying party to insist on an assessment. The client can challenge the hourly rate and the success fee on a solicitor and client assessment: see CPR 48.8 and the losing party can similarly challenge these under CPR 44.4. If the client or the paying party in the litigation chooses not to take this course and agrees to pay unreasonable costs, that is not a reason for giving to the statute a meaning which in my view it cannot bear.
30. It is also true that success fees are fixed in important areas of litigation. These fixed fees were the product of long negotiations between claimant and insurer interests in which a broad view was taken as to what was reasonable to cover all cases of the class to which the agreements applied. I do not know whether the special case of the discounted fee CFA was taken into account in the agreements. I suspect that they were not. We have been advised by our assessor that discounted fees CFAs with success fees are not commonplace, but it is the belief of the Law Society that they are likely to become increasingly common. If they do become more common and it is thought that the assessment process is not sufficiently flexible to produce reasonable results when used in fixed success fee cases, it may become necessary to revisit the rules that have been made for fixed success fees. But the possibility that fixed success fees may lead to unreasonable results in some discounted fee CFAs is not a reason for giving the statute an impossible interpretation.
31. For all these reasons, I am in no doubt that the Agreement which provided for a success fee of 100% on the basic charges of £145 per hour was not in breach of section 58(4)(c).
32. In my view, Mr Bacon's alternative argument to which I referred at para 19 above is misconceived. The words "the amount of the fees which would be payable if it were not a conditional fee agreement" do not invite a factual enquiry as to what bargain the parties would have struck if they had not entered into a CFA. That would be a difficult, if not impossible, task to perform. As Mr Hutton points out, section 58(4)(b) provides for "the percentage by which the amount of fees which would be payable if it were not a conditional fee agreement" and not "the amount of fees which would be payable if no conditional fee agreement had ever been entered into". It follows that no factual enquiry is necessary. All that is required is that the conditional elements of the CFA are removed. In this case, that means removing the provision for a success fee in the event of a win. What is left is an agreement to do the legal work for the basic charges of £145 per hour.

Conclusion

33. For these reasons, I would dismiss this appeal.

Lord Justice Lloyd:

34. For the Appellants, Mr Bacon invited the court to consider the Agreement as one which provides for payment of a basic rate of £95 per hour, with an enhancement first to £145 per hour, and then to £290 per hour, in the event of success. Each of those enhancements is payable "only in specified circumstances", so as to bring the agreement within the definition of a CFA in section 58(2)(a). Only the second is such as to count as a success fee under section 58(2)(b). Whether, in economic terms, the difference between £95 per hour and £145 per hour should be seen as an increase in the event of success or a discount in the event of failure matters not for the purposes of section 58(2).
35. Mr Bacon's submission focussed on the difference of £50 per hour, which he argued was the element of "costs at risk". I agree with Dyson LJ, at his paragraph 21, that this analysis has no relevance to the application of section 58. It might have been relevant if section 58(4)(b) had used different words, such as:

"the amount by which the amount of the fees payable only in specified circumstances is to be increased".

That is not the statutory text and, especially given the contrast with the text of section 58(2)(b) which could easily have been followed if thought appropriate, the section cannot be read as if it were in those different terms.

36. Mr Bacon did not submit that the correct comparison, for the purposes of section 58(4)(b), was with fees at a rate of £95 per hour. Such an argument would have been altogether inconsistent with his main point, namely that the success fee could only properly be applied to the costs at risk. So far from that, it would involve applying the success fee only to the costs which were not at risk. Nevertheless, if the point had been correct, it would have sufficed for his clients' purposes.
37. It seems to me that he was right not to put forward such an argument. The words of the Agreement itself show that £145 per hour (the "basic charges") is the amount which would be payable if the Agreement were not a CFA. Nor does there seem to be anything artificial about such a reading which might suggest that the words used should be ignored in favour of a different underlying substance.
38. For those reasons, and for the reasons given by Dyson LJ, I agree that the appeal should be dismissed.

Lord Justice Buxton:

39. I agree with both judgments.