COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM LEEDS COUNTY COURT
HIS HONOUR JUDGE BEHRENS
8LS 55424, BAILII:  EW Misc 1 (EWCC)
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE MOORE-BICK
LORD JUSTICE ETHERTON
| D. Sousa
|- and -
|London Borough of Waltham Forest Council
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Mr Benjamin Williams (instructed by Parabis Law LLP) for the respondent
Hearing date: 21st October 2010
Crown Copyright ©
Lord Justice Ward:
"3.25 … I have received a submission sent in on behalf of sixteen councils in the London area, stating:
"Insurance companies are increasingly engaging the services of solicitors under CCFAs to handle recovery actions for costs incurred in subsidence claims where local authorities trees are implicated as the cause of the damage. This practice, however, is having a detrimental effect on public finances by significantly increasing claim costs unnecessarily."
The councils state that the costs of these cases have risen greatly and are inflated by 100% success fees.
3.26 The Local Government Association shares the concern of the sixteen councils. It states:
"We share [the councils'] concern that, at a time when councils and the wider public sector are facing increased pressure on resources, the existing rules enable commercial firms to inflate the costs of these cases, despite local authorities typically being willing to settle these claims pre-litigation. It seems to us that the benefits of using solicitors acting under CCFAs accrue almost entirely to the firms themselves, through excessive legal fees, rather than to the claimants, and that this is to the detriment of local taxpayers."
The problem was neatly encapsulated by Longmore L.J. when giving permission for this second appeal:
"This [application for permission to appeal] self-evidently fulfils the criteria for second appeals since it raises a point of principle namely: is it permissible for the court to have regard to the fact that the claimant is insured (and has been fully indemnified) in considering the question whether it was reasonable for the claimant (and/or his insurers) to instruct solicitors on terms which included a success fee?"
"Applying CPR 44 and the Practice Direction, it is incumbent on the court to look at and reflect the reality of the situation, never mind notional this and notional that. The fact is the claimant, in my judgment, was never at risk on costs in this case and as such it was, applying CPR 44, unreasonable of him to rely upon and be allowed to rely upon a conditional fee agreement. I do not accept the submission that one can ignore the reality of the situation that this was a subrogation arrangement. I find the court can and must take it into account in looking at all the circumstances of the case and applying CPR 44. It would be artificial to pretend that it does not exist."
So he refused to allow any success fee.
"It is for that reason that a defendant is not allowed to rely on payment by the insurer as a defence to a subrogated claim against him. Equally, as it seems to me, he should not be allowed to rely on the fact that the Insurer has to fund the claim as a defence to the Insured's claim to a success fee when a claim succeeds. Otherwise the Insurer is in a worse position in recovering the loss that the Insured would have been."
Thirdly, since it was not seriously arguable that a union member acts unreasonably in taking advantage of the funding provided by his union under its CCFA, it is difficult to see why a claimant pursuing a subrogated claim as instructed by the insurer is in a different position. Finally, the insurer in a subrogated claim controls the litigation and dictates to the assured the terms of the agreement between him and the solicitors (subject to an indemnity from the insurer). If those terms included a success fee, it was not unreasonable for the claimant to enter into it. "In effect he had no choice."
The statutory scheme
"For the purposes of this section and 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."
Subsections (3) and (4) spell out the conditions applicable to every CFA and a success fee.
"(6) A costs order made in any proceedings may, subject in the case of court proceedings to rules of court, include provision requiring the payment of any fees payable under a conditional fee agreement which provides for a success fee.
(7) Rules of court may make provision with respect to the assessment of any costs which include fees payable under a conditional fee agreement (including one which provides for a success fee)."
"3(1) Subject to paragraph (2) of this regulation, a collective conditional fee agreement is an agreement which—
(a) disregarding section 58(3)(c) of the Courts and Legal Services Act 1990, would be a conditional fee agreement; and
(b) does not refer to specific proceedings, but provides for fees to be payable on a common basis in relation to a class of proceedings, or, if it refers to more than one class of proceedings, on a common basis in relation to each class.
(2) An agreement may be a collective conditional fee agreement whether or not—
(a) the funder is a client; or
(b) any clients are named in the agreement."
"Client" is defined in Regulation 1(2) to mean a person who will receive the advocacy or litigation services to which the agreement relates. "Funder" means the party who under the CCFA is liable to pay the legal representative's fees. Regulation 4(2) provides that a CFFA agreement must provide that, when accepting instructions in relation to any specific proceedings the legal representative must inform the client as to the circumstances in which the client may be liable to pay the costs of the legal representatives.
"11.8(1) In deciding whether a percentage increase is reasonable relevant factors to be taken into account may include:
(c) what other methods of financing the costs were available to the receiving party."
11.9 A percentage increase will not be reduced simply on the ground that, when added to base costs which are reasonable and (where relevant) proportionate, the total appears disproportionate."
The arguments on this appeal
(1) the judge has taken the analogy with an assignment too far. This is not a claim by an insurer as assignee; if insurers wish to protect their position by taking an assignment, so be it – the court will deal with that when that case comes before it.
(2) The appellant does not deny the insurer's entitlement to pursue a claim with the benefit of a CFA, but that misses the point which is whether it was reasonable to do so in the circumstances of this case.
(3) The union can fund a member's claim with the benefit of a CFA but the case then is quite different from a claim brought by subrogation. In any event the reasonableness of the success fee always remains a relevant factor.
(4) Whilst it may be the case that the insurer is able to dictate the terms on which the claimant's solicitor should conduct the case, and whilst it may be the case that the claimant had little choice but to do as he was told, whatever the demands on the assured or the conduct of the insurer vis-à-vis the assured, the arrangements imposed on the assured would not be binding on the defendant or the costs judge if the demands were unreasonable viewed objectively.
"In this case the solicitors, no doubt first instructed by the insurance company, were the solicitors on the record as solicitors for the respondent. They acted for him and, in the absence of proof of an agreement between him and them or between them and the insurance company that he would not pay their costs, they could look to him for payment for the work done and his liability would not be excluded by the fact that the insurance company had itself agreed to pay their costs."
"6. It is common for a potential litigant to enter into an agreement with a third party under which the third party agrees to fund any costs of litigation that may be incurred by the potential litigant. Pursuant to such agreements trade unions, bodies such as the Royal Automobile Club, and insurance companies customarily instruct solicitors to act for their members or assured. When defeated by such a litigant, unsuccessful parties have, on occasion, invoked the indemnity principle in an attempt to avoid paying costs. The argument advanced has been that the successful litigant is not liable for his costs and, therefore, has no right to recover them. The courts have had no truck with such arguments. They have defeated them by finding that, in the circumstances under consideration, the litigant comes under an independent obligation, albeit one that is unlikely to be enforced, to pay the fees of the solicitor who is acting for him.
7. The leading case is Adams v London Improved Motor Coach Builders Ltd  1 KB 495. The plaintiff's trade union instructed solicitors to act for him in a claim for wrongful dismissal. He made no express agreement to retain them, but permitted them to act for him. The claim succeeded and he sought to recover the solicitor's costs from the defendant. The defendant resisted the claim, contending that it was the union, and not the plaintiff, who was liable for these costs. Bankes LJ held, at p. 501:
"When once it is established that the solicitors were acting for the plaintiff with his knowledge and assent, it seems to me that he became liable to the solicitors for costs, and that liability would not be excluded merely because the union also undertook to pay the costs. It is necessary to go a step further and prove that there was a bargain, either between the union and the solicitors, or between the plaintiff and the solicitors, that under no circumstances was the plaintiff to be liable for costs. In my opinion the evidence falls short of establishing that necessary fact, without which the defendants are not entitled to succeed."
Atkin LJ agreed. He held that the fact that the plaintiff had "ratified the act of the solicitors in acting as his solicitors" carried with it, in the absence of express agreement to the contrary, the obligation to remunerate them."
"In order to apply the doctrine of subrogation it seems to me that full and absolute meaning of the word must be used, that is to say, the insurer must be placed in the position of the assured. Now it seems to me that in order to carry out the fundamental role of insurance, this doctrine of subrogation must be carried to the extent which I am now about to endeavour to express namely, that as between the underwriter and the assured the underwriter is entitled to the advantage of every right of the assured, whether such right consists in contract, fulfilled or unfulfilled, or in remedy for tort capable of being insisted on or already insisted on, or in any other right, whether by way of condition or otherwise, legal or equitable, which can be, or has been exercised or has accrued, and whether such right could or could not be enforced by the insurer in the name of the assured, by the exercise or acquiring of which right or condition the loss against which the assured is insured, can be, or has been diminished."
That does not answer the question whether the doctrine also involves placing the assured in the position of the insurer for the purpose of enforcing the right of action. Can the "client" benefit from a contract, the CCFA, to which he was not a party?
"This principle, namely, that the contract of insurance is res inter alios acta, has since been consistently followed in regard to claims of right but, in matters of discretion such as the award of interest, I think it right that the court should look at the reality of the matter and should take note of the right of the parties under any relevant insurance cover if this is necessary in order to do justice."
"22. … But [MGN] say that in the circumstances of this case, an award of costs increased by a success fee is for two reasons disproportionate. First, they say that it is necessarily disproportionate because it is more than (and up to twice as much as) the amount which, under the ordinary assessment rules, a costs judge would consider reasonable and proportionate. Secondly, they say that it was not necessary to give Ms Campbell access to a court because she could have afforded to fund her own costs, as she did at the trial and in the Court of Appeal.
23. In my opinion these arguments are flawed. The first confuses two different concepts of proportionality. The CPR on costs are concerned with whether expenditure on litigation was proportionate to the amount at stake, the interests of the parties, complexity of the issues and so forth. But article 10 is concerned with whether a rule which requires unsuccessful defendants not only to pay the reasonable and proportionate costs of their adversary in the litigation, but also to contribute to the funding of other litigation, is a proportionate measure to provide those other litigants with access to justice, having regard to its effect on the article 10 right to freedom of expression. MGN do not really deny that in principle it is open to the legislature to choose to fund access to justice in this way.
24. The argument therefore depends upon its second limb, namely that funding litigation in this way becomes disproportionate when a litigant does not need a CFA to be able to sue or, in this case, appeal. Regulation 4(2)(d) of the Conditional Fee Agreements Regulations 2000 (SI 2000/692) requires a legal representative, before entering into a CFA, to inform the client "whether other methods of financing those costs are available". But, as MGN concede, this rule is for the protection of the client, who may have some form of insurance which covers litigation costs and makes it unnecessary for him to enter into a CFA. It is not for the protection of the defendant. Similarly, one of the matters to be taken into account in assessing the percentage to be allowed by way of success fee is "what other methods of financing the costs were available to the receiving party": see paragraph 11.8(c) of the Practice Direction. But that, in my opinion, is also concerned with whether the claimant had the right to have the litigation funded by someone else. It does not contemplate an investigation into his means to decide whether he could have taken the risk of paying the costs himself.
25. There is in my opinion nothing in the relevant legislation or practice directions which suggests that a solicitor, before entering into a CFA, must inquire into his client's means and satisfy himself that he could not fund the litigation himself. …
27. Thus, notwithstanding the need to examine the balance on the facts of the individual case, I think that the impracticality of requiring a means test and the small number of individuals who could be said to have sufficient resources to provide them with access to legal services entitled Parliament to lay down a general rule that CFAs are open to everyone."
Thus Mr Bacon has to concede that a CFA is open to Virgin in this case.
"173. The Government recalled that the purpose of allowing CFAs to be concluded was to achieve the widest public access to legal services funded by the private sector. In particular, CFAs provided a greater range of funding options to allow the widest possible range of people, including but not limited to claimants and defendants just above the means test for legal aid but not sufficiently wealthy to incur litigation costs, to have a real opportunity to have effective access to legal services and to the courts in relation to as many forms of litigation as possible. This was achieved through a fundamental re-balancing of the means of access to justice by resort to private sector funding (and hence funded indirectly by the public as a whole) rather than by the use of public (legal-aid) funds. It was intended to balance the rights of all litigants (claimants, defendants and successful or not), as well as the interests of lawyers who were expected to provide their services to the widest range of persons possible on a CFA. This allowed the State to re-allocate legal-aid resources by removing, for example, through the 1999 Act personal injuries claims from the legal-aid system, given the effectiveness of CFAs.
174. Success fees enhanced the effectiveness of the CFA and were thus an integral part of the CFA scheme. It would ensure that lawyers would provide legal services on a CFA to the widest range of persons and not just to those whose claims were the strongest. Success fees were designed to broadly reflect the overall risk undertaken by a legal representative across his range of work and thus serve a purpose beyond a single piece of litigation. "Excessive" costs in a single case were justified by the general objective. In addition, the level of the success fee had to be high enough to provide a clear incentive to legal representatives to provide services under a CFA to those whose cases were less meritorious. The level also had to be sufficiently limited so as "to afford the client with the practical opportunity to pursue or defend legal proceedings". The maximum uplift was therefore 100%. Moreover, it was also necessary for success fees to be recoverable from the unsuccessful party. Without this possibility, the CFA would not have been useful for claimants, unless the potential value of their cases would cover the success fee and other costs leaving sufficient damages to make the claim worthwhile, or for those seeking non-monetary remedies or for defendants.
175. Promoting thereby access to justice, guaranteed by Article 6 of the Convention, was plainly a legitimate aim for the purposes of Article 10(2 of the Convention."
"195. The essential objective of CFAs, of which success fees recoverable from an unsuccessful defendant were an integral part, were broader than the individual case and were described by the Government at paragraphs 173-175 above. This system was designed to provide a greater range of funding options to allow the widest possible range of people to have a real opportunity to have effective access to legal services and to the courts in relation to as many forms of civil litigation as possible, and to do so via a fundamental re-balancing of the means of access to justice by resorting to private sector funding rather than use of public funds."
So the interference had a legitimate aim.
"198. The Court will examine whether success fees recoverable against unsuccessful defendants are "necessary in a democratic society" to achieve that aim. In particular, it must consider the proportionality of requiring an unsuccessful defendant not only to pay the reasonable and proportionate costs of the claimant, but also to contribute to the funding of other litigation and general access to justice, by paying up to double those costs in the form of recoverable success fees. The applicant did not complain about having had to pay any ATE premiums of the claimant.
199. This complaint also concerns the question of whether the authorities struck a fair balance between two values guaranteed by the Convention which may come into conflict with each other, namely, on the one hand, freedom of expression protected by Article 10 and, on the other, an individual's right of access to court protected by Article 6 of the Convention. As noted at paragraph 142 above, this balancing of individual Convention interests attracts a broad margin of appreciation."
"217. … However, the Court considers that the depth and nature of the flaws in the system, highlighted in convincing detail by the public consultation process, and accepted in important respects by the Ministry of Justice, are such that the Court can conclude that the impugned scheme exceeded even the broad margin of appreciation to be accorded to the State in respect of general measures pursuing social and economic interests …
219. In such circumstances, the Court considers that the requirement that the applicant pay success fees to the claimant was disproportionate having regard to the legitimate aims sought to be achieved and exceeded even the broad margin of appreciation accorded to the Government in such matters."
"4.8. Any person, whether rich or poor and whether human or corporate, is entitled to enter into a CFA and take out ATE insurance. All that such a person needs to do is to find willing solicitors and willing insurers. This gives rise to anomalies and unintended consequences on a grand scale. I will give three examples in the next three paragraphs.
4.9 The tree root claims. It is, in my view, absurd that insurance companies can bring claims against local authorities using CCFAs (as described in paragraphs 3.25 and 3.26 above), thereby doubling the costs burden upon council tax payers. The insurance companies can well afford to fund such litigation themselves and should do so."
Alas I am driven to the conclusion that I cannot compel them to do so. The present law is in their favour. Let Lord Justice Jackson's reforms be enacted sooner rather than later.
Lord Justice Moore-Bick:
Lord Justice Etherton: