England and Wales Court of Appeal (Civil Division) Decisions

IN THE HIGH COURT OF JUSTICE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM LEEDS COUNTY COURT
HIS HONOUR JUDGE BEHRENS
8LS 55424, BAILII: [2010] EW Misc 1 (EWCC)

		Royal Courts of Justice Strand, London, WC2A 2LL
		3rd March 2011

Lord Justice Ward:

1. The tree-lined streets in our cities, towns and villages may be pleasing to the eye, but the pleasure comes at a cost, probably ultimately to each and every one of us. The trees have roots, and the roots frequently damage the adjacent buildings with the invariable consequence that the householder recovers the cost of underpinning and other remedial work on his household insurance, but the insurer then brings a subrogated claim against the local authority responsible for the trees growing in the highway. These claims, frequently made by solicitors acting under Collective Conditional Fee Agreements ("CCFAs"), and the cost of defending them are an increasing cause for concern for local authorities as demonstrated by the number who have voiced support for the London Borough of Waltham Forest Council in its appeal against the order of His Honour Judge Behrens in the Leeds County Court on 13th January 2010 allowing a success fee on the assessment of a claimant's costs of its claim against it, District Judge Fairwood having disallowed the 100% mark up when he assessed the costs.
2. This concern was conveyed to Jackson L.J. who reported in his Review of Civil Litigation Costs:

"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?"

3. What happened was this. The trees for which the Waltham Forest L.B.C. are responsible damaged the property of a Mr D. Sousa. This damage was covered by a household insurance policy written by Virgin Insurance, part of the R.B.S. group. Mr Sousa made a claim against his insurers and was indemnified by them. Cogent Law LLP, solicitors in Leeds, handle all Virgin Insurance claims and in September 2006 they were instructed to recover the loss. Having done nearly £3000 worth of preparatory work, Cogent Law were by the end of January 2008 in a position to make a demand of Waltham Forest L.B.C.. It was only at this point on 1st February 2008 that Virgin Insurance entered into a Collective Conditional Fee Agreement (a "CCFA") with Cogent Law LLP providing for a success fee with a mark-up of 100%. Liability was not disputed and after an exchange of offer and counter-offer the claim was compromised in July 2008 without the need for proceedings to be issued. The Council had agreed to pay £6,250 plus reasonable costs in full and final settlement of the claim. Cogent Law then submitted its Bill of Costs for assessment claiming £2948.60 for pre-CFA services and £2629.60 in respect of their post-CCFA work. Before the matter could come before the costs judge to conduct that assessment, the parties had agreed costs in the sum of £3,750 but they invited the judge to resolve the burning question which divided them, namely whether any success fee was recoverable, and if so, what percentage uplift should be allowed.
4. The assessment was originally set down to be conducted by the regional costs judge but his case overran and as District Judge Fairwood recorded, self-deprecatingly, "It has accordingly been released to a mere mortal district judge." I hope the District Judge will be consoled: this judgment is written by a mere mortal Lord Justice; divine judgment is delivered by costs judges and the Supreme Court only. The heart of the District Judge's conclusion was this:

"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.

5. In coming to the opposite conclusion, Judge Behrens gave four reasons for his judgment. First he considered it to be anomalous if an insurer with an assigned cause of action were able to take advantage of a conditional fee agreement whereas an insurer with a subrogated claim could not. Secondly, he held that it is inherent in the concept of subrogation that the insurer is entitled to take advantage of every right of the assured.

"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

6. Until comparatively recently the only means of funding litigation (apart from legal aid) was to agree an ordinary retainer with a lawyer. The common law position was that lawyers could not agree to conduct litigation on the basis that they would only be paid if the action were successful. The Courts and Legal Services Act 1990 ("the 1990 Act") changed that. Section 58 of the 1990 Act foreshadowed the use of a Conditional Fee Agreement (a "CFA") being an agreement between the client and his legal representatives which provided for his fees and expenses to be payable only in specified circumstances, for example, if successful. Secondary legislation was necessary to allow CFAs to be adopted as they were by virtue of the Conditional Fee Agreements Order 1995 which permitted CFAs for certain categories of litigation. Such an arrangement could make provision for payment of a percentage uplift in fees, a success fee, later set at no more than 100%. Further changes were made by the Access to Justice Act 1999 ("the 1999 Act") which introduced a new section 58, 58A and 58B into the 1990 Act. New regulations were made in 2000.
7. The position now is that by virtue of section 58(1) a CFA satisfying all the prescribed conditions is no longer unenforceable. Section 58(2) contains these definitions:

"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.

8. The supplementary provisions of section 58A include:

"(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)."

9. Section 58B makes new provision enabling litigation to be funded by third parties, for example, insurance companies, on a no-win, no-fee basis, this enactment being necessary to ensure that such arrangements are properly regulated and that they do not fall foul of the common law doctrine of champerty, which was intended to prevent third parties encouraging legal actions for a share of the proceeds. Insurers now provide insurance both "Before the Event" insurance ("BTE insurance") and "After the Event" insurance ("ATE insurance"). By section 58B(8) a costs order made in any proceedings may subject to rules of court include a provision requiring the payment of any amount payable under a litigation funding agreement and under subsection (9), the rules of court may make provision with respect to the assessment of any costs which include such fees.
10. In April 2000 the Conditional Fee Agreements Regulations 2000 came into force setting out the requirements for the contents for a CFA and a success fee. Regulation 4 required the legal representative to inform the client of certain matters including, whether other methods of financing the costs are available and, if so, how they apply to the client and the proceedings in question.
11. In November 2000 the Collective Conditional Fee Agreements Regulations 2000 came into force. A CCFA was defined in regulation 3:

"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.

12. The Civil Procedure Rules 1998 regulate the making of costs orders and the assessment of such costs including success fees. CPR 44.3(4) provides that in deciding what order (if any) to make about costs, the court must have regard to all the circumstances. The basic rule under CPR 44.4(1) is that where the court is to assess the amount of costs, it "will not … allow costs which have been unreasonably incurred or are unreasonable in amount". Under CPR 44.4(2) where the amount of costs is to be assessed on the standard basis, the court will only allow costs which are proportionate to the matters in issue and resolve any doubt which it may have as to whether costs were reasonably incurred or reasonable and proportionate in amount in favour of the paying party.
13. The Costs Practice Direction sets out in paragraph 11 the factors to be taken into account in deciding the amount of costs. 44PD.5 provides:

"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

14. The appellant challenges the four reasons given by the judge, Mr Nicholas Bacon Q.C. submitting on its behalf:

(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.

15. The main thrust of the appellant's submission is that, whilst accepting that anyone can enter into a CFA or a CCFA, that freedom does not make the recovery of the success fee automatic. Recovery and the size of the uplift depend upon whether the costs were reasonably incurred. The fact that the assured is indemnified in respect of these costs is a fact which must be taken into account by virtue of section 11.8(c) of the Practice Direction. It means that the assured should be in no different position from a claimant who has the benefit of BTE insurance. Such a person would not be entitled to claim a success fee.
16. The respondent's preferred approach advanced by Mr Benjamin Williams on his behalf is to submit that since the claim is being brought by the claimant as a result of the exercise of the insurer's rights of subrogation, the fact that the claimant is insured is strictly res inter alios acta or, if I have to descend to Woolfian correctness, "behind the curtain". The court should, therefore, not lift the curtain and should not take account of the fact he is indemnified by the insurer in respect of the costs he may incur in bringing the claim at the insurer's behest. If, however, the curtain is to be lifted then the alternative submission is that since CFAs are open to everyone, they are available to an insurer when seeking to recover a loss which it has suffered through meeting the assured's claim to be indemnified against his loss. There is no good reason to discriminate against insurers when other large corporations or rich people, like Naomi Campbell, can avail themselves of the facility.

Discussion

17. I confess I have not found the case easy. We are quite short of essential facts. That may not be a huge handicap for Mr Bacon or Mr Williams because they have appeared in most of the important cases dealing with this vexed topic of conditional fee arrangements whereas I have lived blissfully in ignorance of its finer ramifications. I am, therefore, making a number of assumptions. We do not have sight of the CCFA entered into between Virgin and Cogent Law LLP. I assume that it is an "umbrella" agreement in standard form providing that the solicitors will have no fee if the case is lost, but that, if the case is won, they will be paid a success fee at a level which is set after a written assessment of risk has been prepared. To the extent that the insurer is instructing the solicitor to undertake this litigation, it is the insurer, the "funder", who in the first place accepts the liability for the success fee. Exercising its rights of subrogation, the insurer then requires the assured to bring a claim for the recovery of the loss which, in reality, has been suffered by the insurer because by now the insurer has satisfied the assured's claim. The assured is the claimant and, for the purposes of the litigation, the solicitors are his solicitors however desultory his contact with them may have been.
18. The issue is, of course, whether the success fee can be recovered but that depends on the answer to prior questions, most importantly, can the successful party recover any costs at all? A fundamental principle which governs the basis upon which a court can properly make an award of costs is the well-established indemnity principle to the effect that, subject to any statutory exceptions which do not apply here, an award of costs can only be made in order to indemnify a litigant against costs and expenses that he has paid, or has become liable to pay. Given the lack of any real contact, indeed any contact at all with the solicitors, what is the evidence that Mr Sousa has become liable for Cogent Law's costs? Davies v Taylor (No. 2) [1974 A.C. 225 may provide some help. The issue there was whether the defendant, whose legal costs had been borne by insurers, could bring himself within section 1 of the Legal Aid Act 1964, which gave the court power to order "costs incurred by" a successful litigant to be paid out of the Legal Aid Fund. The House of Lords held in favour of the claimants. In the leading speech, Viscount Dilhorne said, at p. 230:

"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."

19. The issue arose again in Thornley v Lang [2003] EWCA Civ 1484, [2004] 1 WLR 378 where Lord Phillips of Worth Matravers, giving the judgment of the Court said:

"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 [1921] 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."

20. Thus I am satisfied that Mr Sousa is entitled to recover his costs and those costs can include the success fee. That gives rise to the first point of concern. The only CFA we know about, and we do not know much about it because the agreement itself has never been produced, is the CCFA made between Virgin and Cogent Law. As I understand it, no separate CFA was made between Mr Sousa and Cogent Law. So applying the indemnity principle, can it be said that Mr Sousa has incurred the liability to Cogent Law to pay them 100% uplift on their fees? How does the doctrine of subrogation affect this question?
21. The doctrine of subrogation is well-expressed by Brett L.J. in Castellain v Preston (1883) 11 QBD 380, 388:

"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?

22. It seems to me that that must necessarily follow from an application of Thornley v Lang and Adams v London Improved Motor Coach Builders Ltd. If the assured is ratifying the acts of the solicitors in acting as his solicitors at the instigation of the insurer, he must be ratifying all the instructions given by the insurer to the solicitors to pursue the claim in the name of the assured. Where there is a CCFA in force, the solicitors quite clearly are acting pursuant to it and I feel constrained to hold that the client is to be taken as instructing the solicitors on the same basis as the insurer instructs them, that is to say on CFA terms.
23. So I must treat the CFA as Mr Sousa's CFA, or notionally so at least. Whether the success fee is recoverable, whether with its 100% uplift or 25% uplift, depends on the application of the rules to the facts of the case. The court always has to ask whether the costs have been unreasonably incurred or are unreasonable in amount. In considering that, the court must take all the circumstances of the case into account and in particular must have regard to the Practice Direction which requires the court in deciding whether a percentage increase is reasonable to take into account the other methods of financing the costs that were available to the receiving parties. This lies at the heart of the appellant's appeal. The appellant submits that the court cannot ignore the fact that Mr Sousa is fully indemnified and will not have to pay a penny piece of his costs. There is, therefore, it is submitted, no need for him to protect himself against his liability to his solicitors for his own costs or to the other side if he loses
24. The respondent's response is to submit that the court is not entitled to have any regard to this indemnity because it is "behind the curtain". We must, it is submitted, treat the claim on its face as an individual's claim to recover his loss against the defendant. As between the claimant and the defendant, the insurance is truly res inter alios acta alteri nocere non debet, in other words the claimant is not to be affected by what is being done by others behind his back. It is accordingly submitted that the fact that the insurers are paying his costs come what may must be ignored.
25. I see the force of that argument: it gives effect to the full rigour of an application of the principles of subrogation. If one ignores the indemnity, there is no reason why the claimant should not be allowed to enter into a CFA with an success fee. The appeal would fail on that basis.
26. Nevertheless in a case like this I believe one should look to the reality of the situation because, by virtue of CPR44.3(4), we are required to have regard to all the circumstances when deciding what order to make about costs and so one should not simply sweep the indemnity under the carpet. There is good authority for that approach. In H. Cousins & Co Ltd v D&C. Carriers Ltd [1971] 2 Q.B. 230 a consignment of the plaintiff's goods being carried by road by the defendants disappeared in transit and the plaintiff's claimed upon the insurers who settled their claim on 11th August 1966. The insurers decided to pursue a claim against the carriers and accordingly a writ was issued in the plaintiff's name on June 21st 1968 claiming damages and interest. An issue arose as to the date to which interest should run, the plaintiffs (through their insurers) contending this should be the date of the defendant's payment into court whereas the defendants contended that as the plaintiffs had received a full indemnity from their insurers, no interest should be awarded after that date. It was held that under the doctrine of subrogation the insurers who had indemnified the assured were entitled to sue the wrongdoer in the name of the assured not only to recover the loss but also interest on the whole amount and the fact that the insurers had paid off the assured was res inter alios acta as far as the defendants were concerned. Widgery L.J., with whom the other members of the court agreed said this at p. 240:

"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."

27. Looking at the reality and therefore taking into account the fact that Mr Sousa was in fact indemnified by Virgin, does that lead to the conclusion that a success fee is not justified? If Mr Sousa had before the event insurance it may be he would not recover. He would have had no need to resort to bargaining with the solicitors for a success fee in order to gain access to justice. I see the force of that argument but as I have already found that by virtue of the doctrine of subrogation the assured has little option but to fall in with whatever the insured wishes to do in advancing the claim, it is, in my judgment, impermissible for the assured in some way to disavow the CCFA arrangement made by his insurers. The insurers were in control of the litigation, he was a mere cipher or, as Judge Behrens put it, "In effect he had no choice."
28. If one is looking at the realities, one has to look at the position of the insurer and consider the reasonableness of the insurer entering into this CCFA. Mr Bacon concedes, as he has to, that an insurance company is entitled to enter into a CFA. That has to be the consequence of Campbell v MGN (No. 2) [2005] UKHL 61, [2005] 1 WLR 3394 where the losing defendant newspaper publisher objected to paying a success fee which the highly paid fashion model Naomi Campbell had agreed with her solicitors. Lord Hoffmann said this:

"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.

29. In reality, therefore, the appeal turns upon whether or not it was reasonable for Virgin to enter into a CFA. I can well understand why the appellant so strenuously resists the success fee. As the local authorities see it, household insurers fixed their premium with some regard to the risk not only of having to meet a claim but also the costs involved in seeking to recoup any loss from the local authority whose trees have damaged the assured's property. If insurers can avoid their liability for costs by entering into a CFA they will have received part of their premium without being subject to any risk in respect of it at all. Moreover, and more importantly from the local authority's point of view, having to pay a 100% uplift, which will become the norm in all these cases, casts a heavy debt on straightened local authority resources. Ultimately the citizens suffer either through increased council tax and/or diminished services. The way this system operates gives benefit to the solicitors on the panel and to the insurers but it does not seem likely to spread the largesse to fill the gap created by the withdrawal of public funding for litigation so as to enable solicitors to be instructed by impecunious claimants who, unlike insurance companies, cannot afford their services.
30. Sympathetic though I am to that argument, I do not see how the Court can possibly conclude that if CFAs are open to all, they are nonetheless unreasonable by virtue of the fact only that they will also be open to rich and powerful insurance companies who accept the price of litigation as a necessary incident of their business. If the law permits it, it must be reasonable for rich as well as poor to take advantage of that which the law permits.
31. Thus I would conclude that whether one approaches the matter through an application of pure principles of subrogation or after an examination of the real facts, the appeal should fail.
32. Since the conclusion of the oral argument, the European Court of Human Rights has considered MGN v The United Kingdom (Application no. 39401/04) and written submissions have been made to us about its effect. Relevantly for our purposes, the court unanimously held that there had been a violation of Article 10 of the Convention as regards the success fees payable by MGN. That the requirement to pay success fees constituted an interference with the right to freedom of expression was not seriously disputed by the Government. The interference was, however, prescribed by law and the Court found that it did have a legitimate aim. The Government's observations are interesting for the light they throw on the purpose of this legislation:

"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."

33. Thus the court concluded:

"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.

34. The court, when considering whether the interference was necessary in a democratic society, found:

"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."

35. The court held:

"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."

36. The appellant accepts that even though our case is not one in which Article 10 is engaged, we nonetheless have to have regard to the European jurisprudence and read our domestic provisions relating to costs in accordance therewith. The appellant contends that it would be incongruous and illogical if the means of a CFA party could be taken into account on the question of reasonableness in a case where Article 10 was engaged but not in any other case and so the court should give effect to the clear intention of the legislation which is to give access to justice to those otherwise excluded for financial reasons. The views of the Strasbourg court as to reasonableness were ones we should not ignore.
37. I prefer the view of the respondent that the Court of Appeal remains bound by the decision of the House of Lords: see Kay v Lambeth LBC [2006] UKHL 10, [2006] 2 AC 465. If the House of Lords regarded the fees as reasonably incurred, so should we.
38. The appellant floated a second argument, not previously raised. That is that success fees have such a "chilling" effect as to amount to a denial of justice and a fetter on the freedom of access to the court in breach of Article 6. I agree with the respondent that this is not an argument the appellant should be allowed to run at this stage of the proceedings. I am not prepared to entertain the argument: indeed I am far from convinced on cursory examination that it is well founded.

Conclusion

39. I have expressed my sympathy for the appellant and all the other local authorities whose legal costs are doubling as success fees bite. Being an old curmudgeon, already a judge for almost as long as I practised at the Bar, I cannot but feel that in many respects CFAs have operated as a bonanza for insurers and their lawyers. I entirely endorse the view of Lord Justice Jackson. He identified four flaws in the recoverability regime, the first of which was this:

"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:

40. The circumstances giving rise to this appeal, the legislation governing conditional fee agreements and the decisions of the courts below have all been described by Ward L.J., whose account I gratefully adopt. I agree with him that the appeal should be dismissed, but in view of the importance of the issues I think it appropriate to express the reason for my conclusion in my own words.
41. The essential facts giving rise to this appeal are simple and not uncommon. Mr. Sousa's house was damaged by the encroaching roots of trees growing in the pavement outside. He made a claim under his household policy which was settled by his insurers. Exercising their rights of subrogation the insurers made a claim against the council in his name but at their expense, in the sense that they were obliged to indemnify him against the costs of the proceedings. Solicitors were instructed pursuant to a collective conditional fee agreement with the insurers. The claim was settled on terms that the council would pay the costs.
42. When the matter came before District Judge Fairwood for a detailed assessment of costs the council argued that the success fee should be disallowed because Mr. Sousa had never been at risk in respect of the costs, which would be borne by the insurers in any event, and should not therefore have instructed solicitors on conditional fee terms. It was unreasonable of him to have done so. DJ Fairwood agreed with that submission. He thought that he ought to have regard to what he considered to be the reality of the situation and disallowed the success fee. On appeal His Honour Judge Behrens took a different view. He held that, however one viewed the matter, it was not unreasonable for Mr. Sousa to have entered into a conditional fee agreement with the solicitors who acted for him in the litigation.
43. Before this court Mr. Bacon Q.C. submitted that the District Judge was right. It was unreasonable and unnecessary, he argued, for Mr. Sousa to instruct solicitors on a conditional fee basis because the insurers, for whose benefit the proceedings were being taken, were bound to indemnify him against the costs. He was not at risk of paying anything; indeed, he did not even have to put the solicitors in funds. In those circumstances he ought not to be allowed to recover their success fee as part of his costs, because that would involve imposing an unnecessary additional burden on the council.
44. It is important to remember that although the proceedings are being conducted at the behest of the insurers, the parties to the litigation are in fact Mr. Sousa and the council. Accordingly, any solicitors instructed in the matter were acting for him and he became liable for their costs: see Davies v Taylor (No. 2) [1974] A.C. 225 and Thornley v Lang [2003] EWCA Civ 1484, [2004] 1 WLR 378, to which Ward L.J. has referred. However, since the insurers were entitled to direct the conduct of the litigation, they were entitled to decide whom he should instruct to act on his behalf. Moreover, both for that reason and because they were obliged to bear the costs of the action, they were also entitled to require him to instruct the solicitors they chose on a conditional fee basis.
45. As between Mr. Sousa and the council the existence of a policy of insurance under which he had already been indemnified against his loss is in law irrelevant – it is res inter alios acta, as it used to be said. The fact that the insurers are bound to indemnify him against the costs of the proceedings does not provide the council with a defence to a claim to recover the costs, any more than it provides it with a defence to a claim for the damage caused to his house. If Mr. Sousa had been uninsured, it would have been impossible to suggest that it was unreasonable for him to instruct solicitors on a conditional fee basis. The fact that he is insured makes no difference. Moreover, if the insurers had refused his claim, he would have been obliged to conduct the litigation in a reasonable way if he wished to recover from them the costs of doing so. Again, in those circumstances it could not have been suggested that it was unreasonable for him to have entered into a conditional fee agreement. It follows that if one looks at the matter from the point of view of Mr. Sousa, who is the true party to the litigation, there are no grounds for saying that it was unreasonable to instruct solicitors on a conditional fee basis.
46. However, in my view one reaches the same conclusion if one views it from the perspective of the insurers, that is, on the basis that they are the real parties to the litigation, as indeed in practical terms they are. On that footing they are seeking to recover through Mr. Sousa the loss which they have incurred as a result of the damage to his house caused by the council's trees. They are entitled to instruct solicitors of their choice and are entitled to enter into a conditional fee agreement to protect themselves in the same way as any other litigant. Neither the fact that they are financially strong nor the fact that they are a commercial organisation (nor even the fact that they are insurers) precludes that, as Mr. Bacon was forced to concede. Nor can I see any reason for holding that it was unreasonable for them to do so. One must assume that they entered into a collective conditional fee agreement because they considered it to be in their commercial interests.
47. In my view, to allow the council to benefit from the relationship between Mr. Sousa and his insurers would be to disregard established principles in this area of the law. However, an equally important objection to the council's argument is that it seeks to take advantage of that relationship for some purposes while seeking to ignore it for others. Thus, it argues that the insurers' obligation to indemnify Mr. Sousa against any liability for costs means that he was not at risk for costs but disregards the corollary, namely, that they were at risk for the costs and that the proceedings were brought for their benefit, albeit in his name. One must either disregard the insurance arrangements entirely (as I think is the proper course) or recognise that "in reality" the insurers are the parties in suit and as such are at risk for costs and entitled to protect themselves, just like any other litigant, by entering into a conditional fee agreement. The difficulty I have with the District Judge's decision is that in his enthusiasm to look at "the reality of the situation" he looked at only half of it. Having found that Mr. Sousa was not at risk for the costs, he did not ask who "in reality" was at risk for them and who "in reality" was going to benefit from the conditional fee arrangement.
48. Mr. Bacon sought to argue that insurers set their premiums at whatever level is sufficient to cover the costs of proceedings and that it is unreasonable for them to instruct solicitors on a conditional fee basis, thereby relieving themselves of having to pay the costs if proceedings should fail. There are at least three answers to that point, however. The first is that there is no evidence of how premiums are set in this or any other case. All one can say is that it would not be surprising if premiums were set at levels that took account of arrangements such as the collective conditional fee agreement that existed in this case, since they inevitably have a bearing on net recoveries. The second is that how insurers choose to set premiums for different types of cover is entirely a matter for them. Third, the authorities make it clear that commercial organisations are not precluded from instructing solicitors on a conditional fee basis, if they consider that to be to their advantage.
49. The comments made by Jackson L.J. in paragraph 4.9 of chapter 10 of his Final Report ('Review of Civil Litigation Costs: Final Report') to the effect that insurers can and should bear the costs of proceedings in cases of this kind without recourse to conditional fee agreements may make good sense, but they carry within them the implicit acknowledgement that as the law now stands they are not obliged to do so. They provide no basis for holding that Mr. Sousa, and through him his insurers, are not entitled to recover the success fee in this case.
50. Mr. Bacon sought at one point to suggest that Mr. Sousa's position is no different from that of a claimant who has 'Before the Event' ("BTE") insurance against legal expenses. Such a person, it was said, cannot justify instructing solicitors under a conditional fee agreement because he has another means of funding the proceedings. In support of that argument he relied on certain observations made by Lord Phillips M.R. when giving the judgment of the court in Sarwar v Alam [2001] EWCA Civ 1401, [2002] 1 WLR 125.
51. In Sarwar v Alam the court was concerned with a claim for damages for personal injury caused in a road traffic accident. The claimant lived in the same household as the defendant and instructed solicitors under a conditional fee agreement to act on his behalf. He also purchased After the Event ("ATE") insurance to protect himself against liability for the defendant's costs, should he lose. The claimant was not aware that a provision in the defendant's motor insurance policy extended to him, with the defendant's consent, BTE insurance that would cover the costs of pursuing a claim and his solicitors made no enquiries into the position. The claim was settled for a modest amount before proceedings had been started on terms that the defendant would pay the claimant's reasonable costs. In proceedings relating to costs the defendant's insurers argued that the claimant should have made use of the BTE insurance available to him instead of taking out ATE cover.
52. In the event the court held that it had not been unreasonable for the claimant to proceed as he had, given that the BTE cover was provided by the defendant's insurer, to whom the policy gave a considerable degree of control over the conduct of any proceedings. The court, however, expressed the view that solicitors instructed to act for claimants in small claims of that kind should take steps to investigate the existence of BTE insurance and, if it is available, refer the claimant to the BTE insurer unless there are good reasons not to do so. The overriding principle, it was said, is that the claimant should act in a reasonable manner: see paragraphs 45-50.
53. Those observations, although obiter, suggest that it may in some circumstances not be reasonable for a claimant to instruct solicitors under a conditional fee agreement and to purchase ATE insurance if BTE insurance is available, but that is a far cry from the position in the present case. Mr. Sousa did not have BTE insurance, as far as we know, and if the insurers had not settled his claim he would have had to finance the litigation himself, even if he was entitled to recover the costs from them and eventually succeeded in doing so. His position was therefore quite different, both in principle and in practice, from that of a claimant who has BTE insurance. In any event, it has since been made clear that the mere fact that a person is able to fund litigation without resorting to a conditional fee agreement does not make it unreasonable for him to do so: see Campbell v MGN (No. 2) [2005] UKHL 61, [2005] 1 WLR 3394. Indeed, Mr. Bacon accepted that the insurers would be entitled to instruct solicitors on such a basis if they were pursuing a claim in their own name, for example, as assignees.
54. Finally, it is necessary to mention briefly the recent decision of the European Court of Human Rights in the case of MGN v The United Kingdom (Application No. 39401/04), in which the court held that the award of costs in favour of Miss Campbell against MGN that included a success fee (upheld in Campbell v MGN (No. 2)) involved an infringement of the defendant's right to free speech. Mr. Bacon submitted that the decision supported the wider proposition that it is unreasonable for a claimant who can finance the litigation without recourse to a conditional fee agreement to do so and that therefore Mr. Sousa should not be allowed to recover the success fee as part of the costs in this case.
55. I am unable to accept that submission for two reasons. First, because in MGN v The United Kingdom the court was concerned with the question whether the liability to pay a success fee involved a disproportionate interference with the newspaper's right of free speech and was unreasonable on that account. The case is not, therefore, remotely comparable to the present. Second, because unless the liability to pay a success fee can be said to infringe the defendant's rights under the Convention (which is clearly not the case here), questions of proportionality and reasonableness do not arise. It is for Parliament to decide what arrangements viewed overall will best serve the general requirement for access to justice. Moreover, the submission is contrary to the decision of the House of Lords in Campbell v MGN (No. 2), which remains binding on this court.

Lord Justice Etherton:

56. I agree that this appeal should be dismissed for the reasons given in both judgments, save that I agree with Moore-Bick L.J. that the better approach to the resolution of the appeal is to regard the existence of the insurance policy as irrelevant.