England and Wales High Court (Senior Courts Costs Office) Decisions

IN THE HIGH COURT OF JUSTICE
SUPREME COURT COSTS OFFICE
FROM BATH COUNTY COURT

		Clifford's Inn, Fetter Lane London, EC4A 1DQ
		18 May 2006

Senior Costs Judge

BACKGROUND

1. This is a preliminary issue in detailed assessment proceedings as to whether the Claimant's CFA is unenforceable because it is in breach of Regulation 3(1)(b) of the Conditional Fee Agreements Regulations 2000 in that it fails to specify how much, if any, of the success fee relates to the postponement of the payment of the Claimant's Solicitors' fees and expenses. The Claimant's position is that the original CFA is not in breach of Regulation 3(1)(b), that if there is a breach it is not a material breach and that the matter has been put beyond doubt by a deed of rectification. The Defendant says that the deed of rectification, which is dated 2 November 2004, is in any event ineffective to remedy any breach.

2. The Claimant was injured on 15 March 2001 when she fell whilst crossing a road which had been left by the Defendant in a poor state of repair. She attended her solicitors on 3 September 2001, and on 19 September 2001 entered into the CFA. On 20 January 2004 the Claimant's claim was settled for £4,000 plus costs without proceedings having been commenced. The present proceedings are Part 8 costs only proceedings. The Claimant claims costs of £5,826.23 plus disbursements of £962.97 and VAT of £1,035.41, giving a total of £7,824.61, including a 50% success fee on the base costs.

3. The Defendants requested sight of the Claimant's CFA in May 2004. It was produced to them on 2 June 2004. The Defendant took the view that the CFA was defective and informed the Claimant's Solicitors of their view on 8 June 2004. On 22 November 2004 the Claimant and her Solicitors entered into a deed of rectification.

   THE LAW

4. So far as relevant, Regulation 3 of the 2000 Regulations provides:

   "3. Requirements for Contents of Conditional Fee Agreements Providing for Success Fees

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

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

   (b) must specify how much of the percentage increase, if any, relates to the costs to the legal representative of the postponement of the payment of his fees and expenses;

   ...

   (3) In this Regulation "percentage increase" means the percentage by which the amount of the fees which would be payable if the agreement were not a conditional fee agreement is to be increased under the agreement."

   SUBMISSIONS

5. The Defendant asserts that the CFA is in breach of that Regulation because under the heading "Success Fee" the agreement states:

   "You [the claimant] cannot recover from your opponent the part of the success fee that relates to the cost to us of postponing receipt of our charges and disbursements (as set out in paragraph (a) and (b) at Schedule 1). This part of the success fee remains payable by you."?

   Schedule 1 records that the success fee is 50% of basic charges and cannot be more than 100% and continues:

   "The percentage reflects the following:

   (a) the fact that if you win we will not be paid our basic charges until the end of the claim;

   (b) our arrangements with you about paying disbursements;

   (c) the fact that if you lose, we will not earn anything;

   (d) the assessment of the risks of your case. These include the following:

   - the prospects of success from the evidence available;

   - the value of the claim; and

   - the type of accident.

   (e) any other appropriate matters."

6. The agreement does not specify how much of the success fee is attributable to the irrecoverable postponement element and Mr Marven argues that this is a breach of Regulation 3(1)(b). He goes on to argue that this is a material breach, relying on paragraph 107 of Hollins v Russell [2003] EWCA Civ 718:

   "The key question, therefore, is whether the conditions applicable to the CFA by virtue of section 58 of the 1990 Act have been sufficiently complied with in the light of their purposes. Costs Judges should accordingly ask themselves the following question: "Has the particular departure from a regulation pursuant to section 58(3)(c) of the 1990 Act or a requirement in section 58, either on its own or in conjunction with any other such departure in this case, had a materially adverse effect either upon the protection afforded to the client or upon the proper administration of justice?" If the answer is "yes" the conditions have not been satisfied. If the answer is "no" then the departure is immaterial and (assuming that there is no other reason to conclude otherwise) the conditions have been satisfied."

7. Mr Marven argues that any conclusion other than that the CFA is unenforceable would be contrary to the express intention of Parliament, namely that a CFA which does not specify the postponement element of the success fee is unenforceable. That the CFA in this case does not do so cannot be overlooked as a minor shortcoming.

8. Mr Marven suggests that there is clearly a materially adverse effect on the Claimant's protection, since the CFA did not specify what part of the success fee was the irrecoverable postponement element. In addition he submits that there is a materially adverse effect on the administration of justice because the agreement does not make clear what part of the success fee can properly be claimed from the Defendant as the paying party. In this respect he relies on the judgment of HHJ Stewart QC in Garrett v Halton Borough Council, 5 April 2005, paragraphs 7 to 11.

9. Mr Marven points out that the Claimant's Solicitors carried out a risk assessment on 5 September 2001. So far as can be ascertained this risk assessment was not seen by the Claimant. It sets out the nature of the case and the expected damages. It gives an estimate of the likely future costs for any negotiated settlement (£2,500) and a fully contested trial (£5,000). It also deals with the likely duration of the case until settlement (12 months), or to the end of trial (2 years plus). The chances of success are put at 65% and the success fee to be applied is 50%. If one used the matrix for calculating success fees, which is commonly referred to by solicitors, the success fee based on a 65% chance of success would be 54%. The risk assessment is signed by a fee earner, S L Morse, and a supervisor has approved the success fee at 50% and written some comments in a note dated 13 September 2001.

10. Among the documents disclosed by the Claimant's Solicitors is a copy of the original attendance note of 3 September 2001. This concludes:

    "... SM would discuss with a colleague and carry out a risk assessment. She should check whether she has legal expenses insurance. If not we would decide whether to take the matter on, on a "no win, no fee" basis. SM would contact her once we had carried out the risk assessment."

11. On 17 September SM telephoned Mrs Brennan and told her that the solicitors were happy to proceed on a no win, no fee basis and that they would go through the documentation on 19 September. On 19 September an attendance note shows that SM attended upon Mrs Brennan and went through:

    "all the necessary information required for the conditional fee agreement. Confirming that the same information would be sent in a letter together with a copy of the conditional fee agreement."

    The CFA itself is dated 19 September.

12. On 25 September 2001 a letter, signed by Christine James, was sent from the Solicitors to the Claimant enclosing a copy of the CFA. The letter states:

    "In particular it was explained to you:

    (a) the circumstances in which you may be liable to pay our disbursements and costs including:

    (i) if you win the case - in that event these costs will be claimed from the defendant but you remain primarily responsible for them;

    (ii) if you receive an interim payment of compensation - we may require you to pay some money at that point towards disbursements;

    (iii) if you end this agreement, you pay our basic costs - see condition 7(a) on page 9 of the agreement;

    (iv) if we end the agreement we may require you to pay our costs at that point - see condition 7(b) on page 9.

    (b) the circumstances in which you may seek assessment of our charges and disbursements and the procedure for doing so.

    ...

    Further the success fee was explained to you, details of which are set out at Schedule 1 on page 5 of the agreement. The success fee is set at 50% which reflects the points set out in Schedule 1. In particular:

    (1)(a) If you lose your case, we will not receive our costs.

    (b) Our assessment of the risks of your case. These include the prospects of success from the evidence available, the value of the claim, the type of accident and the likely duration of the case."

13. Mr Marven points out that in the Law Society Conditions, attached to the CFA, under the head "What Happens if you Win?" the following appears:

    "You will not be entitled to recover from your opponent the part of the success fee that relates to the cost to us of postponing receipt of our charges and our disbursements. This remains payable by you."

14. He argues that the letter of 25 September does not go far enough in explaining to the Claimant about the deferment element of the success fee. In any event it is a post contractual document since the agreement had already been signed and was therefore already unenforceable. Any defect cannot in his submission be cured by that letter. Reading the agreement and giving it its ordinary English meaning it indicates that there is a postponement element but that element is not specified in breach of the Regulation.

15. Mr Marven referred to the Court of Appeal decision in Spencer v Wood, a case in which the CFA said on its face that the success fee was 75%, but in its schedule made no reference at all to the proportion of the 75%, if any, which related to the cost to the solicitors of the postponement of the payment of their fees and expenses. The risk assessment which was disclosed showed a deferment element of 50%. At first instance the Judge asked:

    "... 50% of what? Of the success fee? Of the profit costs? How is the postponement charge reflected in the overall success fee of 75%. The risk assessment is silent as to that as are the agreement and the schedule."

16. On appeal to the Court of Appeal the appellant suggested that the extent to which the CFA was unenforceable should be determined by reference to the extent to which the breach of the Regulations had had a materially adverse effect. In the Appellant's submission it was possible to identify that 50% of the 75% success fee related to the postponement element, so it was said that the success fee of 25% should be recoverable from the Defendant, as well as the whole of the profit costs. Lord Justice Brooke said:

    "15. In my judgment, this course is not open to us. The point that Mr Buck has so boldly taken was not considered to be of any merit by any of the distinguished advocates who argued the case of Hollins v Russell because, no doubt, they would have perceived that it had no merit at all. The words "shall be unenforceable" mean what they say. The law is well used to the concept that certain types of agreement are unenforceable, and in the context of this statute Parliament decided that unless a CFA satisfied all the conditions applicable to it by virtue of Section 58(1), it would not be exempt from the general rules as to the enforceability of CFAs at common law. In my judgment we have to interpret the statute as we find it."

17. So far as the deed of rectification is concerned this was not relied on by Mr Bacon, other than as confirmation of the state of mind of the parties at the time the CFA was entered into. He did not seek to rely on the deed in order to retrieve the situation, and indeed would have been in difficulties had he done so because of the decision of the Privy Council in Kellar v Williams (Appeal No.13 of 2003) [2004] UKPC 30, where it was held that if a subsequent arrangement was made between solicitor and client which produced a larger cost bill than the original agreement:

    "The appellant's attorneys would be entitled simply to refuse to accept the amended basis and require the respondent to revert to the original framework. They could do so on the ground ... that that amendment had come into existence subsequent to the making of the costs basis and so could be disregarded by the paying party if he wished." (paragraph 20)

18. Mr Marven argues that the deed cannot cure what he says is the defect in the written explanation to the Claimant, which in his submission is in breach of Regulation 4(3) and 4(5), since the CFA is itself part of the written explanation and is flawed.

19. Mr Bacon argues that the 50% success fee is both reasonable and clearly reflects only the pure risk of losing. It does not include any element for postponement. He relies on the deed of rectification to confirm that it was not Stone King's intention to charge the Claimant, and that the Claimant understood that she was not going to be charged any element of success fee representing the costs of postponement. The deed records:

    "The parties to this deed have agreed that the CFA does not accurately set forth the true bargain between them so far as regards the particulars identified below.

    ...

    (4) The client has been advised by the solicitors prior to the signing of this deed of her right to seek independent legal advice before entering into the deed and the client having sought such advice hereby confirms her intention to rectify the CFA as appears below.

    ...

    Now this deed witnesses that the parties agree that Schedule 1 of the CFA must at all times be read and construed with the addition of the words "the matters set out at paragraphs (a) (b) above together make up 0% of the increase on basic charges. The matters at paragraphs (c), (d) and (e) make up 50% of the increase on basic charges. So the total success fee is 50% as stated above."

20. The agreement is the subject of considerable criticism from Mr Marven on the grounds of undue influence and abuse of confidence. The Claimant's solicitors wrote to her on 19 October 2004:

    "You will recall that the success fee we agreed was set at 50%, on the basis of the risks involved in your case. You will also recall that we did not make any specific charge to cover the delay in our receiving either payment of our costs (paragraph a) or recovery of outgoing expenses such as payment of medical reports (paragraph b). In effect the intention was that the full 50% success fee related to paragraphs c, d and e under Schedule 1. The difficulty we face is that if the court decides that the conditional fee agreement was unenforceable, then we would not be able to recover our costs from the defendant.

    As it stands, we do not think the existing agreement makes this clear. We are concerned that the parties' intention is made absolutely clear to the defendants insurers and have therefore drawn up a deed of rectification for your approval and signature.

    In the circumstances I am bound to advise you that you are entitled to seek independent legal advice before entering into this deed, but if you do wish to do so, I should be grateful if you could deal with the matter urgently ..."

21. The Claimant wrote to her solicitors on 30 October:

    "I have yet to make a decision on the deed of rectification. In the meantime will you write to me, for information purposes the amount of current cost and win fee."

22. No response to that letter has been produced but on 7 November 2004 the Claimant wrote again sending the deed signed. Mr Marven points out that in the letter of 19 October the Claimant is told what she recalls without being given the opportunity to say what her recollection was, nor is there any evidence that she did in fact receive independent legal advice.

23. Mr Bacon's main submission is that there has been, in any event, no breach of Regulation 3(1)(b), since this is not a case where an additional success fee was charged to the client in respect of postponement, and the 50% success fee did not include any element representing the cost of postponement. He argues that the words "if any" in Regulation 3(1)(b) are critical and says that the effect of those words is that the obligation, to identify how much of a success fee represents the postponement element, only applies where there is such an element. In his submission Schedule 1 mistakenly included the standard Law Society wording when clearly there was no element of the success fee that represented the cost of postponement. The effect of the error is, he submits, evidenced by the deed to which I have referred.

24. 24. With regard to materiality Mr Bacon submits that if the court finds that there has been a breach of the Regulations, that breach was not material within the test laid down in Hollins v Russell. He also relies on the evidence of Catherine Skinner in her witness statement dated 8 November 2005 to which she exhibits her letter to the Claimant of 19 October 2004, and the two letters in reply from the Claimant. Although the witness statement sets out the firm's normal procedures in relation to CFAs, there is no direct evidence from the fee earner concerned, Ms Morse, and therefore no evidence of what actually took place when she met the Claimant on 19 September 2001. Mr Bacon argues that it is clear from the subsequent correspondence about the deed of rectification that the client has thought about the situation and, according to the recital in the deed, has obtained independent legal advice. Although it must be said that there is no other evidence that this is in fact the case, and the deed appears to have been witnessed by a private individual rather than a solicitor.

25. Mr Bacon submits that the failure to specify a nil element in respect of postponement is clearly a very small matter, as envisaged by the Court of Appeal in Hollins at paragraph 50:

    "... the maxim that the law does not care about very small matters must be applied when a court considers whether there has been compliance with any of the CFA Regulations or what the effect of non-compliance will be. ..."

26. He suggests that this case is on a par with Titchband v Hurdman (see Hollins paragraphs 131 to 135). In that case the CFA made it clear that "none of the success is attributable to the postponement in paying our fees". The Court of Appeal thought the point taken by the Defendant's insurers was "as unattractive as it is unmeritorious". The judgment continues:

    "132. ... Clauses 32 and 33 of the CFA are headed "Success Fee" and read:

    "32. The reasons we have set the success fee at the level stated are explained on the Risk Assessment form attached to this agreement. We will not seek to recover from you any of the success fee which we are unable to recover from your opponent.

    33. None of the success fee is attributable to the postponement in paying our fees."

    133. The amount of the percentage uplift on the solicitor's basic charges was omitted from the first page of the CFA. The Risk Assessment form, however, makes it clear that there is to be a total success fee of 45%, made up of one component of 15% and six components of 5% each. One of the latter represents the cost of postponing payment of the solicitor's costs until the end of the case.

    134. Mr McLaren was compelled to admit that as between solicitor and client no court would dream of allowing the solicitor to recover this 5% from his client when he was necessarily unable to recover it from the paying party due to the operation of CPR 44.3B(1)(a). The language of Clause 32 makes this clear. The reality therefore is that, despite what is said in the risk assessment calculation, none of the recoverable success fee is attributable to the postponement in payment of the solicitor's fees. Taken together, Clauses 32 and 33 prevail over the risk assessment schedule, and thus on its true construction the CFA in this case complies with the Regulations."

27. Mr Bacon argues that factually the position in the present case is exactly the same. There was never any intention to charge the Claimant any postponement element, nor did it form any part of the 50% success fee which represented a pure risk assessment. Mr Bacon relies on the following passages in Hollins:

    "108. We would not draw any formal distinction between the conditions contained in the section itself and those contained in the Regulations. The meaning of "satisfies" must be the same in each case. However, it is more difficult to envisage questions of degree coming into the question whether the conditions in the section have been sufficiently met. Either the CFA relates to permissible proceedings or it does not. But one example might be that in section 58(4)(b) which requires that a CFA providing for a success fee "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". Was that condition sufficiently met by an agreement such as that in Tichband v Hurdman, which left blank the percentage in the clause where it should have been filled in but stated it clearly in the risk assessment ... The answer to that question is obviously "yes".

    109. We would, however, draw from both Jeyeanthan [R v Secretary of State for the Home Department ex p. Jeyeanthan [2000] 1 WLR 394 at 395] and Factortame [R (Factortame Ltd) v Secretary of State for Transport (No.8) [2002] EWCA Civ 932 at [61]] the principle that sufficiency or materiality will depend upon the circumstances of each case. This is not to encourage paying parties to trawl through the facts of each case in order to try to discover a material breach. Quite the reverse. At the stage when the agreement has been made, acted upon, and success for the client has been achieved, it is most unlikely that any minor shortcoming which the paying party might discover in the agreement or the procedures leading up to its making will amount to a material breach of the requirements or mean that the applicable conditions have not been sufficiently met.

    ...

    222. Thus the judge conducting the assessment should first consider the position as between solicitor and client. If the judge had done so in Tichband v Hurdman, for instance, he would immediately have seen that the client could not possibly have avoided his liability under the CFA by relying on the discrepancy between clause 33 and the risk assessment .... If the court considers that as between solicitor and client the client would have just cause for complaint because some requirement introduced for his protection was not satisfied, or that the CFA otherwise offends public policy (for example, through a breach of section 58(3)(b), a provision with which we are not concerned on these appeals), then the CFA will be unenforceable, and the indemnity principle will operate in favour of the paying party.

    ...

    224. The court should be watchful when it considers allegations that there have been breaches of the Regulations. The parliamentary purpose is to enhance access to justice, not to impede it, and to create better ways of delivering litigation services, not worse ones. These purposes will be thwarted if those who render good service to their clients under CFAs are at risk of going unremunerated at the culmination of the bitter trench warfare which has been such an unhappy feature of the recent litigation scene."

28. In relation to Spencer v Wood Mr Bacon seeks to distinguish this case, the distinguishing factor being that in Spencer the deferment element was said to be 50%, although it was not clear of what, and in that case the CFA must have been incomprehensible to the client. In those circumstances he suggests that Spencer provides no guidance in this case.

    CONCLUSIONS

29. In my judgment Regulation 3(1) of the 2000 Regulations is perfectly clear. The CFA must specify how much of the percentage increase relates to the cost of postponement. In my view the words "if any" do not mean that if the deferral element is nil there is no need to mention it. Those words are there to ensure that the client is left in no doubt as to the position, even if the deferral element is nil. In those circumstances I find that there has been a breach of the Regulation.

30. As to materiality Mr Marven asserts that there is clearly a materially adverse effect on the Claimant's consumer protection but for the reasons given by the Court of Appeal in Hollins, at paragraph 134, that submission is not made out. The failure to specify a postponement element means that nothing in respect of this would ever be recoverable from the client.

31. Mr Marven goes on to argue that there is also a materially adverse effect on the administration of justice, relying on the decision of HHJ Stewart QC in Garrett v Halton Borough Council. Judge Stewart based his decision firmly on the principles set out in Hollins v Russell. His decision is also presently the subject of an appeal to the Court of Appeal. Given that I too rely on the judgment of the Court of Appeal in Hollins for my conclusion I derive no assistance from the decision in Garrett. ??On the facts of this case I cannot find that there has been any materially adverse effect on the administration of justice. For the reasons put forward by Mr Bacon, which I accept, and in the light of the guidance given by the Court of Appeal in Hollins, I find that the CFA is, in principle, enforceable and the reasonable and proportionate costs under it are recoverable.

32. For the sake of completeness I mention that during the course of argument I was referred both to the decision of the Court of Appeal in Jones v Caradon Catnic Ltd [2005] EWCA Civ 1821, which concerned a breach of Section 58(4) of the 1990 Act, and to Holmes v Alfred McAlpine Homes (Yorkshire) Ltd [2006] EWHC 110 (QB) Stanley Burnton J, which dealt with the back dating of a CFA. Given the basis upon which I have reached my decision there is no need for me to examine the effect of either of those authorities. Nor is there any need for me to come to a concluded view about the deed of rectification. As indicated during the course of argument it is clearly open to severe criticism, and may indeed not be effective to bring about its intended result, certainly so far as the paying party is concerned.