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

IN THE HIGH COURT OF JUSTICE
SUPREME COURT COSTS OFFICE
From Manchester District Registry
Mercantile Court

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

Senior Costs Judge Hurst:

THE PRELIMINARY ISSUE

1. By action commenced in the Manchester Mercantile Court the Claimant claimed £4,705,216 plus interest from the Defendant. He alleged that that sum had been wrongfully debited to his personal deposit account with the Defendant. The Claimant eventually recovered judgment for £258,373.00 together with interest, which was subsequently quantified, by consent, in the sum of £144,543.37. A total of £402,916.37. This result was recorded in judgments dated 8 December 2003 (the substantive judgment) and 10 December 2004 (the judgment on costs).
2. On the 25 July 2005, His Honour Judge Hegarty QC sitting in the Manchester Mercantile Court made an order as to costs which is somewhat complex, but the details of which are, for the moment, not relevant. The order continues:

"6. The costs incurred after 10 December 2004 will be reserved to the detailed assessment proceedings in respect of the Claimant's and Defendant's costs of this action. 7. The assessment of the Claimant's and Defendant's costs in the action shall be undertaken by the Senior Costs Judge at the Supreme Court Costs Office . . . All questions in relation to the validity and /or enforceability of the Conditional Fee Agreement entered into between the Claimant and his solicitors, dated the 2 July 2002 shall be determined by the Senior Costs Judge . . . as a preliminary issue in the detailed assessment proceedings…"

3. The order went on to give directions for the service of points of claim and points of response.
4. The conditional fee agreement (CFA) dated the 2 July 2002 is in a somewhat unusual form in that it states:

"Success Fee

This is 100% of our base fees. In addition you will pay £50,000 provided you recover damages in excess of £1 million pounds."

5. On the 16 August 2005, the Claimant and his solicitors entered into a Deed of Variation which added to the original CFA, the name of a fee earner and the hourly rate which had been omitted, and also removed all reference to the payment of £50,000, which appeared at various points in the original CFA. The Defendant submits that the CFA is unenforceable (it is also submitted that there are a number of other material departures from the statutory requirements). The Defendant's case is that the Deed of Variation is irrelevant and even if relevant, does not result in the CFA being valid.
6. Mr Morgan seeks to overcome his difficulties with the CFA in three ways, firstly by relying on the Deed of Variation; secondly by arguing that there has, in any event, been no materially adverse effect; and thirdly, by severance of the offending words.
7. He argues that the original CFA has been rectified by the Deed of the 16 August 2005, and that the rectification is retrospective to the date of the original CFA and the agreement, as rectified, does not contain the provisions which are attacked in the Defendant's points of claim. Accordingly, therefore, in his submission, the Claimant's claim for costs is backed by a valid and enforceable CFA.
8. Alternatively Mr Morgan QC submits that the original CFA is enforceable, although he accepts that, by reason of the inclusion of the stipulation for an additional success fee of £50,000, if the claimant recovered damages in excess of £1 million, the original CFA departed from the statutory scheme. He submits, however, that there has been no materially adverse effect upon the protection afforded to the client or upon the proper administration of justice.

SUBMISSIONS

The Deed of Variation

9. Mr McLaren QC argues that the original CFA is plainly champertous at common law and also fails to comply with section 58 of the Courts and Legal Services Act 1990. Given the terms of the Deed of Variation and the Claimant's points of response, this is not controversial. The real issue is the effect, if any, of the Deed of Variation of the 16 August 2005. Mr McLaren argues that it is irrelevant to the preliminary issue since it was made after the costs order of HHJ Hegarty QC of the 25 July 2005 and long after the judgment of the 10 December 2004. In any event, he argues, even if it were effective, it cannot impose upon the paying party an obligation greater than that which existed at the date of the relevant order. In support of this, he relies on the judgment of the Privy Council in Kellar v Carib West Limited, Privy Council number 13 of 2003, 24 June 2004. In that case, the appellants appealed against the decision that the respondent's bill of costs should be on the basis of a quantum meruit and, maintained that the contract between the client and his attorneys was unenforceable since it constituted an unlawful conditional fee agreement and that therefore no costs were payable by the appellant paying party. On the facts, their lordships found that a letter written to the appellant's attorneys by the respondent's attorney dated the 6 October 2000 did not constitute any change of substance in the fee paying agreement between them. It was at most the substitution of one method of calculating fees for that which had hitherto been understood to apply and it was a rational method of calculation of the respondent's liability for fees. The judgment continues:

"20 . . . it was quite open to the respondent and his attorneys to vary the fee agreement to an hourly charging arrangement if they so wished, and their lordships consider that there was clearly good consideration for such a variation. When the bills are taxed they could be prepared, if the respondent's attorneys choose, on the hourly charging basis and then be subject to the normal process of ascertainment of the hours properly to be charged and of the applicable rate or rates to be applied to the work done. If, however, it were likely to produce a larger costs bill than the original framework, an amalgam of hourly rates and brief fees (which appears to be unlikely from the terms of the letter), 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."

10. In Kitchen v Burwell Reed and Kinghorn Limited [2005] EWHC 1771 (QB) Gray, J. stated, obiter, at paragraph 18:

"Although costs were not to be assessed until a later date, I consider that the Claimant's entitlement to a success fee as against the Defendant, falls to be determined at the date of judgment."

11. Gray, J. having been referred to Kellar, stated:

"However the variation in that case post-dated the costs order, so the case is distinguishable from the present one. In any event, as I have said I do not accept that the Claimant's argument on waiver is well-founded. I have already set out my conclusion that the variation of the retainer pre-dated the costs order."

12. In short, Mr McLaren argues that variation after the date of Judgment can be of no effect.
13. Mr McLaren argues further that the Deed is a Deed of Variation and not a Deed of Rectification. In summary, he submits that: there is no evidence which proves the precise terms of the original agreement between Mr Oyston and his solicitors; there is no assertion that the agreement, as to payment of £50,000 was never made. In support of this argument he relies on Snell's Equity (31^st edition):

"14-09 A claim for rectification cannot succeed unless there is strong evidence that, by mistake, the instrument does not truly record the terms of the transaction; even in such a case rectification will not be granted if some other suitable course of action is open.

. . .

14-14 What is relevant is "the intention of the parties at the time when the deed was executed, and not what would have been their intent if, when they executed it, the result of what they did had been present to their minds". There can thus be no rectification if the omission of a term was deliberate, even if this was due to an erroneous belief that the term was unnecessary or that it was sufficiently dealt with in the antecedent oral agreement, or that the term was illegal, or a breach of covenant, and similarly if the instrument intentionally contains a provision which in fact means something different from what the parties thought it meant. Rectification ensures that the instrument contains the provisions which the parties actually intended it to contain, and not those which it would have contained had they been better informed."

14. Mr McLaren argues that a deed of rectification is not apt where the original agreement properly reflects the intention of the parties, which is subsequently seen to be unlawful. The purpose of rectification is to correct an agreement where the agreement entered into by them does not accord with that agreement, owing to a common mistake. In support of this proposition, he relies on Spry "Equitable Remedies" 6^th edition at 612:

"It should be borne in mind that different considerations apply where the relevant mistake does not arise through lack of conformity between a document and the concurrent intention of parties, but rather arises through an error underlying that intention itself. Where there is no lack of conformity between the document and the concurrent intention, the basis for rectification does not exist. So an error of law or other error, may have related only to the expected consequences of an agreement and not to what the parties have actually agreed."

15. On this basis Mr McLaren argues that it cannot be a Deed of Rectification since there is no suggestion that the agreement for the payment of £50,000 in certain circumstances was not made. The original CFA correctly set out the agreement between the client and his solicitors. In his submission a subsequent deed which seeks to exclude the offending words, cannot be a Deed of Rectification. The true position is that Mr Oyston and his solicitors had intended to create a lawful agreement but, having found that they had not done so, wished to vary it so as to make it lawful. Given the passages from Snell's Equity and Spry's Equitable Remedies quoted above, this deed cannot be one of rectification so as to take effect as if backdated. In addition, it falls foul of the principle in Kellar in that it imposes an additional burden on the paying party after the date of judgment.
16. Mr Morgan suggests that since the Claimant did not recover damages in excess of £1 million, the stipulation for an additional success fee never became effective and in any event would never have been allowed between the parties and would never have been payable by the Claimant to his solicitors. Mr McLaren responds, correctly in my view, that this submission, if correct would drive a coach and horses through the legislation and the authorities and would mean that any breach of the Act or Regulations by a conditional clause, however grave, would be irrelevant if circumstances later arose which did not trigger the condition. He relies on the decision of the Court of Appeal in Jones v Caradon Catnic Ltd, a case in which the success fee had been set at 120%, where the Court found that there was plainly a materially adverse effect on the administration of justice.
17. Mr McLaren argues that section 58 of the 1990 Act sets the boundaries in relation to champerty and public policy:

"There is, of course, no more cogent evidence of a change of public policy than the expression of the will of Parliament."

(per Steyn, LJ in Giles v Thompson [1993] 3 All ER 321 at 331(d).

18. In those circumstances he submits that the court should not grant relief in respect of an agreement which is clearly champertous.
19. In relation to Jones v Caradon Catnic Ltd Mr McLaren relies in particular on the judgment of Lord Justice Laws where he stated:

"34 . . . but I cannot categorise as marginal the failure in the present case to respect the statute.

35. a statement of 120% success fee is a stark departure from the 100% maximum specified in paragraph 4 of the Conditional Fee Agreements Order 2000. That maximum is plainly central to the regime on whose terms the legislature has accepted the legality of CFA. Its being disregarded, even if in the result, it could be shown that no one would be the loser, is inimical to the administration of justice . . ."

20. As to the CFA itself, which is dated the 2 July 2002, Mr McLaren spent some time going through it, criticising its shortcomings, in addition to the obvious problem caused by the inclusion of the £50,000 provision. He suggests that the agreement contains inconsistencies and does not constitute a proper written explanation of the CFA. He suggests that the CFA has "been thrown together" without any consideration of the effect of the £50,000 provision.
21. Mr Morgan sought to rely on a witness statement of Mr Oyston dated the 23 March 2006. Mr McLaren objected to the late admission of this evidence but I decided to admit it since it sets out the reasons for the inclusion of the clause relating to £50,000 in the original CFA.
22. With regard to the Deed of Variation, Mr Morgan suggests that Mr McLaren's reliance on the passages from Snell's Equity and Spry: Equitable Remedies, is misplaced, since this is not a request to the court to grant an equitable remedy. The deed is a retrospective consensual rectification. He relies on Section 59 of the Solicitor's Act 1974 relating to contentious business agreements as authority for entering into a retrospective agreement as to remuneration. The relevant passage reads:

"59(1) Subject to subsection (2) a solicitor may make an agreement in writing with his client as to his remuneration in respect of any contentious business done, or to be done, by him . . . providing that he should be remunerated by a gross sum, or by reference to an hourly rate, or by a salary, or otherwise, and whether at a higher or lower rate than that at which he would otherwise have been entitled to be remunerated."

23. Subsection (2), so far as relevant, states:

"(2) Nothing in this section or in section 60 to 63 shall give validity to –

. . .

(b) Any agreement by which a solicitor retained or employed to prosecute any action, suit or other contentious proceeding, stipulates for the payment only in the event of success in that action, suit or proceeding . . ."

24. Mr Morgan submits that this latter passage is for the avoidance of doubt only, and that, given the wording of subsection (1), it must be possible to vary the agreement with the client retrospectively, subject to the effect of Kellar.
25. Mr Morgan submits that Kellar is difficult to interpret and suggests that none of the issues before the Privy Council gave rise to the dictum relied on by the Defendant. In that case, he says, the paying party's arguments did not raise the matters relied on by the Defendant in these proceedings, thus, although the finding of the Privy Council is clearly against the Claimant, it is contained in the single statement in paragraph 20 unsupported by any reasoning. He suggests that the decision concerned the removal of a potential invalidity in an individual retainer. The question being: what was unreasonable about such a retainer? He asks rhetorically whether it would have been possible for the receiving party to bind the paying party by an agreement prior to judgment and suggests it would be very strange if that was so, since the test is one of reasonableness throughout. He argues that it is not clear whether the particular issue was contested before the Board or what authority, if any, was cited, and, given the absence of any reasoning, whether the decision was made simply on the facts of the case. Nor is the decision based on the application to costs of any recognised legal principle.
26. Mr Morgan also argues that the decisions to the Privy Council are not binding on an English Court although they are "entitled to very great weight indeed" (Dulieu v White [1901] 2 KB 699 at 677 Kennedy, J). He argues that this decision ought not to be applied in this case, where the Defendant stand s to gain a massive windfall benefit from an unintended problem with the solicitor / client retainer and where the only variation to the original agreement is to remove any arguable obstacle to enforceability as between solicitor and client. He points out that the client was advised to obtain independent legal advice which he did from an in-house senior member of staff who had qualified as a lawyer but no longer practised. In addition, Mr Oyston is an extremely experienced businessman.
27. With regard to the Defendant's argument that the only reason for the Deed of Variation is so that the solicitors could recover their costs, Mr Morgan points out that in Kitchen v Burwell Reed, the client was not going to pay in any event. In this case, Mr Oyston is affirming his own substantial liability for costs. He already knew that he would only recover 80% to 90% of his costs following the judgment on costs of the 10 December 2004. He had also agreed to be liable for up to £25,000 if there was a shortfall in the recovery. Mr Morgan suggests that not all clients would have agreed to vary the terms of the CFA, but the Claimant had had the advantage of in-house advice, albeit from a non-practising solicitor.

Materiality

28. Mr McLaren also relies on Jones v Caradon Catnic Ltd in relation to Mr Morgan's argument that this was not a material breach. Lord Justice Brooke deals with Mr Morgan's argument in that case at paragraphs 22 and following. He first considered Hollins v Russell [2003] EWCA Civ 718 and Titchband v Hurdman. In respect of Hollins, he stated (at paragraph 25):

"We were satisfied that the effect of the CFA read as a whole, was sufficiently clear and the failure to specify the position did not affect the protection given to the client or the administration of justice to any material degree. We, therefore, allowed the appeal. That was a very, very minor breach of the regulations which would have made no difference in the result."

29. In respect of Titchband v Hurdman, Brooke, LJ, stated (at paragraph 26)

"Although it was a breach, it was clearly a totally immaterial breach, and the appeal was therefore allowed in that case too."

30. He continued:

"29. This [ie, Jones] was not a case in which our attention should be devoted to consumer protection or client protection. It was a case in which our attention, should be devoted, when determining whether the breach was material or not, to the administration of justice. In Hollins v Russell we explained why the Act and the Order and the Regulations had these two pronged purposes. One, which was consumer protection, and that part of the statutory scheme has now been revoked and there are no longer regulations concerned with consumer protection: consumer protection issues are now dealt with by the The Law Society's disciplinary mechanisms. The other was the administration of justice. That side of the statutory scheme has not been revoked and is still in being by the combination of the Act and the Order which prescribes that the success fee shall not exceed 100% in any circumstances.

. . .

32 [having recited the opposing arguments] I prefer Mr Friston's submissions. As he said, this is a provision which is concerned with the proper administration of justice. The Act provides that any agreement which does not comply with the Act and the Order is unlawful and does not come within the umbrella protection of the CFA scheme. This is, on any showing, a more serious breach compared with the trivial breaches set out in the two cases to which I have referred. I would, therefore, allow the appeal and declare the CCFA, in this case unenforceable."

31. Lord Justice Laws, part of whose judgment I have already quoted, went on to state:

"36. If we were to treat this violation as marginal, we should, in my judgment, be acting flat against the grain of the legislature's substantial policy objectives attained by section 58(1): that is, to confine within the strict levels, specified by rule, the acceptability of costs arrangements of this kind."

Laws, LJ had agreed with the judgment of Brooke, LJ and Lord Justice Maurice Kay agreed with both judgments.

32. As to materiality, and whether the CFA is unenforceable under section 58(4) of the 1990 Act, the principal issue is the point at which the question of enforceability is to be decided. Mr Morgan accepts that if the issue is to be determined at the outset, ie when the CFA is made, his argument cannot succeed. He relies, however, on Hollins which he suggests provides for retrospective interpretation, particularly at paragraph 107:

"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 departure in this case had a materially adverse effect either upon the protection afforded to the client or the proper administration of justice?"

. . . "

33. Mr Morgan suggests that if the court were looking at potential consequences viewed from the date of the CFA itself, it would have used entirely different language. He suggests there is no ambiguity in the language actually used and that it is clear that the citation sets out the ratio of the case which must be followed. He suggests that this interpretation is consistent with the clear policy underlying Hollins namely to put an end to pointless technical challenges. If paying parties are able to argue about potential breaches viewed from the date when the CFA is made, the scope for technical challenges remains large. If on the other hand, a breach is only judged immaterial if it has adverse consequences, the scope for technical challenges is reduced, so that they are only available where a real injustice would otherwise result.
34. Mr Morgan points out that Master Seager Berry and Master Gordon-Saker have come to the view that the appropriate time to look at unenforceability is at the time of the detailed assessment proceedings rather than at the time when the CFA is entered into, as against my own decision in Richards v Davis (25 November 2005) where I took the opposite view:

"Any breach, if there is a breach, will take place at the time when the CFA and ATE insurance policy is entered into. If there is no breach at that stage, there cannot, in my view, be a breach because of a subsequent change of circumstances. Whether or not the breach is material, must, in my judgment be viewed from the date of the original agreements. As Mr Williams points out, one of tests is whether the breach has a materially adverse effect on the protection afforded to the client. The fact that the client may not actually suffer major prejudice at the end of the day, does not mean that the test is not met. In any event, on the facts of this case, it seems that the client has suffered financially" (paragraph 93)

35. Mr Morgan argues that that decision is wrong, in that it fails to take account of the language of the Court of Appeal in Hollins. He argues that where there has been a departure from the statutory requirements, there is nothing illogical in making the judgment as to whether that departure is material at the date when the issue arises for determination rather than some earlier date, when the consequences of the departure could not be known. Thus, in this case, he points out that the conditions for triggering the £50,000 bonus fee have not been met and the client has not been adversely affected by the stipulation for the bonus, nor, in his submission has the administration of justice. In any event, the client is aware of the position and has agreed with his solicitors to the variation.

Severance

36. In respect of the CFA as originally drafted, Mr McLaren argues that there is a clear breach of section 58(4) of the 1990 Act which requires:

"(4)(b) [the CFA] must state the percentage by which the amount of the fees which would be payable if they it were not a conditional fee agreement is to be increased; and

(c) the percentage must not exceed the percentage specified in relation to the description of proceedings to which the agreement relates by order made by the Lord Chancellor."

37. The CFA states the percentage of the success fee as required by section 58 (4)(b) but it also includes the words:

"In addition you will pay £50,000 provided you recover damages in excess of £1 million pounds."

38. Whatever the effect of that additional provision is, Mr McLaren submits that the agreement falls foul of the provision in section 58(4)(c) that the percentage must not exceed that prescribed by the Lord Chancellor, ie, 100% -see Conditional Fee Agreements Order 2000, Article 4. In his submission, sub paragraph (b) is not complied with because the £50,000 is not a percentage, but on any reading, sub paragraph (c) is breached because the success fee itself is stated to be 100%. On that basis, and relying on Jones v Caradon Catnic Ltd [2005] EWCA Civ 1821, the CFA is unenforceable because it does not comply with the provisions of the Act.
39. Severance is Mr Morgan's third option. He relies on Chitty on Contracts, 29^th Edition, paragraphs 12 – 195 and 196:

"The true test under this head is, therefore, whether the illegal promise is substantially the whole main consideration or the promise now sought to be enforced." (paragraph 195)

40. and later:

"This second limitation on the courts' power to sever the bad from the good is that they will not do so unless this accords with public policy. For example, part of the consideration for the promise of either party may be such as so gravely to taint the whole contract, that there is no ground of public policy requiring the courts to assist either party by severing the offending parts. In all the cases a distinction is taken between a merely void and an illegal consideration. In this context, illegal means that which amounts to a criminal offence or is contra bonos mores, where, on grounds of public policy, the illegality may, though it does not invariably, preclude severance. Agreements, the object of which is to defraud the Revenue, or which involve trading with the enemy, have been held to be incapable of severance. On the other hand, examples of mere voidness on grounds of public policy are agreements to oust the jurisdiction of the court and agreements which are merely in restraint of trade" (paragraph 196)

41. Mr Morgan argues that it is clear from reading the CFA, that the whole or main consideration for the solicitor's performance is the expectation of base costs and success fees in the event of the success. Furthermore, it was only if over £1 million were recovered that the £50,000 would be payable at all. Accordingly, in his submission, there would be no objection to severance on that ground. He argues that the present case falls squarely within the category of "mere voidness on grounds of public policy"
42. In Aratra Potato Co Ltd v Taylor Joynson-Garrett [1995] 4 All ER695 Garland, J the court refused severance in relation to a champertous contract. Garland, J dealt with severance in this way (at 710f):

"Mr Spearman submitted that severance could be effected by deleting the words "for any lost cases" from the sentence ending "our bills will be delivered when each matter is finalised in all respects with a 20% reduction from the solicitor/client costs for any lost cases". To my mind, this is not severance but an attempt at unilateral rectification by removing to TJG's pecuniary disadvantage, the words creating a differential fee. Severance is not possible."

43. In respect of that judgment, Mr Morgan argues, that it is not clear whether the judge was taken to any authority on severance, since none is cited in the judgment, and he does not appear to consider the principles set out in the citation from Chitty, which I have quoted. Furthermore the severance sought in that case, would have affected the consideration payable across the board and would have been far more extensive than that sought in this case.
44. Mr Morgan argues that the blue pencil test is possible. Severance is a device to reconcile two conflicting doctrines: Common Law strives to interpret documents lawfully and, on the other hand, the law will not enforce an illegal contract. In his submission the use of severance does not change the contract and may be applied at any time.
45. Mr McLaren argues that the overriding issue in relation to this is public policy. He argues that the doctrine of severance is not available in the present case. The use of severance does not further the administration of justice but leads to uncertainty and speculation. If Mr Morgan's argument was correct he could have saved the situation in Jones v Caradon Catnic Ltd by severing the success fee. In respect of public policy, Mr McLaren points out that one of the issues against which champerty was intended to guard, was the inflating of damages: ". . . dishonest inflation of claims is an ever present danger in litigation" (per Steyn. LJ in Giles v Thompson [1993] 3 All ER 321 at 334). In this case, he points out that the Claimant recovered only 5.49% of his claim.

" The relevant head of Public Policy exists to protect public justice and the courts have always focused on the protection of the party confronted with maintained litigation . . . that head of Public Policy does not exist to protect the plaintiffs. It exists to protect the interests of the Defendants" (per Steyn. LJ at 336)

46. The attitude of the court was discussed in Awwad v Geraghty [2001] QB 570. Mr McLaren points out that at page 596(b) the court specifically rejected the notion that the Claimant's attitude made a difference to the outcome. The court found that if the facts led the court to the conclusion that the agreement was champertous then it would refuse to enforce the agreement whatever the appellant's attitude.
47. May, LJ who agreed with Scheimann, LJ, concluded (at page 600):

"In my judgment, where Parliament has, by what are now . . . successive enactments, modified the law by which any arrangement to receive a contingency fee was impermissible, there is no present room for the court, by an application of what is perceived to be public policy, to go beyond that which Parliament has provided . . ."

Lord Bingham, CJ agreed with both judgments.

48. Mr McLaren submits that it does not matter that the blue pencil rule could be applied to the agreement. If the effect of the agreement is to go beyond the statutory limits, then overriding public policy reasons apply. To reach any other conclusion would enable a solicitor to flout the rules and say that it did not matter, because the court would never enforce the excess and it could always be severed. He again relies on the decision of the Court of Appeal in Jones v Caradon Catnic Ltd.
49. In respect of Mr McLaren's reference to there being a temptation to inflate damages, Mr Morgan pointed out that there was very detailed argument as to costs before HHJ Hegarty QC. The case had been hard fought both on liability and on quantum and the judge rejected the Defendant's suggestion that the claim had been exaggerated or that the Claimant had acted unreasonably or improperly in regard to the quantum claim. The order of the 10 December 2004 is a partial costs order in the Claimant's favour (see judgment number 2, 10 December 2004, paragraph 62 to 64).

CONCLUSION ON THE PRELIMINARY ISSUE

The Deed Of Variation

50. The CFA dated the 2 July 2002, is in clear breach of section 58(4) of the 1990 Act. The Deed of Variation dated the 16 August 2005 is ineffective to rectify the situation as against the paying party. By that date the issues between the parties had been resolved by the judgments of the 8 December 2003 and the 10 December 2004. Following the decision of the Privy Council in Kellar, it cannot be right that a Deed of Variation can be used to impose a greater burden on the paying party than existed before judgment. The fact that the client is in agreement, is of no assistance. If the position were otherwise, it would be open to solicitors and their successful client to, for example, alter the level of success fee late in the day. It appears from the facts of this case, that the Deed of Variation was only entered into when it was realised that the original CFA had a potentially fatal defect. The question of the effect of Deed of Variation, had it been entered into before the judgment of the 8 December 2003, has not been argued in front of me, and I express no view about it.

Materiality

51. As to Mr Morgan's point about retrospective interpretation, it is helpful to look at KU v Liverpool City Council [2005] EWCA Civ 475 where Brooke, LJ again presided. The question before the court was the extent to which different levels of success fee could be allowed. The judgment of the court says this:

"20. When a court has to assess the reasonableness of a success fee, it must have regard to the facts and circumstances as they reasonably appeared to the solicitor at the time when the CFA was entered into (see paragraph 11.7 of the Costs Practice Direction and Atack v Lee [2004] EWCA Civ 1712 at [51] ). The principle that the use of hindsight is not permitted when costs are being assessed is an old one: see Francis v Francis & Dickerson [1956] P 1887, 95; and compare, in a different context, Argyll (Duchess) v Beuselink [1972] 2 Lloyds Rep 172, per Megarry, J at page 184:

"In this world there are few things that could not have been better done if done with hindsight. The advantages of hindsight include the benefit of having a sufficient indication of which of the many factors present are important and which are unimportant. But hindsight is no touchstone [of negligence] . . . the standard of care to be expected of professional men must be based on events as they occur, in prospect and not in retrospect.""

52. In my judgment the decision of the Court of Appeal in Jones v Caradon Catnic Ltd makes it clear that a breach of section 58(4)(b) and (c) of the 1990 Act, has inescapably brought about a materially adverse effect on the proper administration of justice. The provision, with regard to success fee, is described by Laws, L J at paragraph 35 of Jones as "plainly central to the regime" and he maintained his view "even if, in the result, it could be shown that no one would be the loser . . ." In those circumstances, I do not revise my view of the law, as stated in Richards v Davis and find that Mr Morgan's argument on materiality fails.
53. Mr Morgan's submission that the departure from the statutory requirements had not materially adverse effect, fails for the reasons given by the Court of Appeal in Jones v Caradon Catnic Ltd.

Severance

54. With regard to severance, I put to Mr Morgan the question why, if it was possible, he had not applied for it to be used in Jones v Caradon. He stated that he had other reasons for not arguing that particular point. The same point arises in respect of Spencer v Wood [2004] EWCA Civ 352 (Brooke, LJ presiding). In that case, the CFA made no reference at all to the proportion of the 75% success fee which related to the cost to the solicitors of the postponement of the payment of their fees and expenses. The risk assessment, however, indicated that the percentage in respect of deferment of costs, was 50%. This caused great confusion, and the court below held that there had been a breach of the CFA regulations and that the CFA was unenforceable. Brooke, LJ gave the judgment and the other two members of the court agreed:

"10. The judge applied the [Hollins v Russell] test and held that the breach had materially adverse effects upon the protection afforded to the Claimant in that he did not know which part of the 75% success fee would be recoverable from the Defendant so that he would be obliged to pay it, himself. In those circumstances, the judge held that the CFA generally was unenforceable. In this regard, he was applying the substituted section 58(1) of the Courts and Legal Services Act 1990, the terms of which are set out in paragraph 12 of the judgment in Hollins v Russell. He also applied the guidance I gave in Hollins v Russell at paragraph 102 of the judgment, when I said, of the consequences of failure to satisfy the applicable conditions, which included a breach of the regulations:

"Unlike, for example, the Consumer Credit Act 1974, there is no graduated response to different kinds of breach: it is all or nothing."

55. The judgment continues:

"13. [Counsel for the Appellant] has accepted that if he fails on the first part of his appeal, that is an end of the matter. His argument is that the punishment imposed by section 58(1) on its natural construction is disproportionate to the solicitor's crime, and that it is wholly unjust to deprive a solicitor of the ability to recover any fees at all for the services he has rendered for his client, simply because there has been a material breach of one of the regulations.

. . .

15. . . . 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 unenforceability of CFAs at common law. In my judgment we have to interpret the statute as we find it."

56. Had the device of severance been open to the appellant in that case, the words relating to the success fee could simply have been excised and the solicitors would have been able to recover their base fees.
57. In my judgment severance is not available to the Claimant in this case.
58. This situation cannot be saved by severance since, given the facts of this case and for the reasons given by the Court of Appeal in Spencer v Wood, Giles v Thompson and Awwad v Geraghty, it would be contrary to public policy to permit severance.
59. If either the Deed of Variation or severance were to be permitted late in the day, this would have the effect of enabling virtually all defective CFAs to be put right late in the day, even if this was only after the paying party had pointed out the alleged defects. This would not accord either with the statutory framework laid down for CFA or with the correct approach to public policy as laid down by the Court of Appeal in the authorities which I have cited. In these circumstances, I find that the CFA is unlawful and unenforceable.

OTHER BREACHES

60. Given the decision I have reached on the preliminary issue, it is not strictly necessary to deal with the other breaches alleged by the Defendant. However, in case I am wrong in my decision on the preliminary issue, I will deal with them briefly.
61. Mr McLaren submits that there are breaches of the CFA Regulations 2000. He says the unusual nature of the agreement required a proper explanation to be given to the client, both orally and in writing, so as to comply with Regulations 4(3) and (5). He suggests that the explanation given is inadequate having regard to the complexity of the agreement. In particular, there is no explanation of the inconsistency between the statement:

"If you win your claim, you pay our base fees, our disbursements and a success fee. The amount of these is not based on or limited by the damages . . ."

62. and the definition of the success fee which provides that, in addition to the 100% uplift:

". . . you will pay £50,000 provided you recover damages in excess of £1 million"

Mr McLaren argues that an element of the success fee is clearly based on the amount of the damages.

63. Secondly, he argues that the CFA does not deal with the question of whether the £50,000 element of the success fee will be reduced in common with any other reduction by the court or by agreement with the paying party or whether that sum remains payable in full whatever the court order or the agreement with the paying party.
64. Under Regulation 3, Mr McLaren asserts that there are numerous breaches, namely: failure to specify the reasons for setting the £50,000 element of the success fee at the level stated in the agreement (Regulation 3)(1)(a). Failure to specify how much of the £50,000 element of the success fee is attributable to postponement elements (Regulation 3(1)(b)). Failure to agree that the £50,000 element of the success fee will cease to be payable by the client to the extent that it is disallowed by the court on assessment (3)(2)(b). The CFA did not provide that the £50,000 element of the success fee ceased to be payable by the Claimant if an agreement was made that it was not recoverable between the parties, and did not provide that base fees ceased to be payable by the Claimant to the extent that an agreement was made that they were not fully recoverable from the Defendant. The CFA in fact envisaged that a shortfall of up to £25,000 plus VAT might be charged to the client (Regulation 3 (2)(c)).
65. In respect of these last allegations, Mr McLaren submits that the CFA gave far less protection to the Claimant than it would have done had it complied with Regulation 3(2)(c). Instead it gave him a potential liability to pay £75,000 plus VAT.
66. In relation to the alleged breaches of Regulation 3(2)(c) Mr McLaren relies on the analysis of the Regulation in Ghannouchi v Houni Limited [4 March 2004] Master Seager-Berry. The Master took the view that Regulations 3(2)(b) and 3(2)(c) dealt with separate issues and were not to be construed as dealing with identical elements of the bill, stating (at paragraph 69):

"The references [in Regulation 3(2)(c)] are to what is payable under the CFA, namely base costs and percentage increase and are not limited to the percentage increase."

67. Mr Morgan acknowledges that there is a departure from the statutory requirements, but again, argues that the departure has no materially adverse effect and that no serious reader of the CFA could doubt that the £50,000 figure was only payable in the event of £1 million being recovered. He argues that there is no uncertainty with regard to the £50,000 and whether it would be reduced in common with any other reduction by the court or by agreement with the paying party. Thus Mr Morgan denies any breach of Regulation 4 but accepts that there is a breach of Regulation 3. With regard to Regulation 3(1)(a) a departure is accepted but materially adverse effect denied since the £50,000 was the client's idea in the first place. No departure is accepted in relation to Regulation 3(1)(b) since the postponement of payment is dealt with specifically in the Schedule to the CFA and in addition, there is no materially adverse effect because it is clear to any reader that no element of the £50,000 is attributable to postponement. In respect of Regulations 3(2)(b) and 3(2)(c) departure is accepted but Mr Morgan, again asserts that there is no materially adverse effect for the reasons he has already given.
68. Mr Morgan disputes the suggestion that the CFA did not provide that base fees ceased to be payable by the Claimant to the extent that an agreement was made that they were not fully recoverable from the Defendant. He submits that Ghannouchi was wrongly decided on this point.
69. The relevant parts of Regulation 3 are as follows:

"Requirements for Contents of Conditional Fee Agreements providing for success Fees -

. . .

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

. . .

(b) If -

(i) any such fees are assessed, and

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

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

(c) if –

(i) sub paragraph (b) does not apply, and

(ii) the legal representative agrees with any person liable as a result of the proceedings to pay fees subject to the percentage increase that a lower amount than the amount payable in accordance with the Conditional Fee Agreement is to be paid instead,

the amount payable under the Conditional Fee Agreement in respect of those fees shall be reduced accordingly, unless the court is satisfied that the full amount should continue to be payable under it.

(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."

70. Mr Morgan makes the point that if the intention of the legislature were that any reduction in base costs (as opposed to success fee) were to be passed on to the client in CFA cases, this provision would have appeared in Regulation 3(2)(b) as well, since there is no logical reason for drawing a distinction between the two arms of the regulations. Secondly, he says there is no policy reason for base costs reductions in CFAs alone of all solicitors' retainers, to be passed on to the client. The amount payable under a CFA represents all the costs of the proceedings save any which are irrecoverable under its terms. If Ghannouchi is correct, and costs are settled, and one the factors in the settlement was that the CFA assisted litigant would not have recovered full base costs because of, for example, some failure on some issue, the solicitor's right to be paid his base costs would be reduced. The solicitor would not suffer this reduction if the matter went to detailed assessment. Mr Morgan, therefore, argues that the natural consequence of Master Seager Berry's interpretation in Ghannouchi is that far more cases would go to detailed assessment, and settlement of costs would be positively discouraged.
71. Mr Morgan suggests that a sensible result can be achieved by interpreting the words "lower amount" in regulation 3(2)(c) as a reference to lower amount of success fee.
72. Mr McLaren submits even if Ghannouchi is not followed and the requirements of regulations 3(2)(b) and 3(2)(c) are in relation to success fees only, the CFA is still in breach because in the event of recovery of more than £1 million the £50,000 success fee element remains payable by the Claimant whether or not recovered by the paying party

CONCLUSIONS ON OTHER BREACHES

73. In respect of Regulation 3(2)(b) there is no difficulty. The language is clear and refers to the percentage increase. If any amount is disallowed on assessment it cannot be recovered from the client without an order of the court. The difficulty arises with the Regulation 3(2)(c). The intention behind the regulation was that where costs between the parties were agreed at a figure which involved a reduction in the level of the success fee, the client could not be charged the full success fee without an order of the court. Unfortunately, the way in which the regula tion has been drafted is confusing and supports the interpretation which Master Seager-Berry has put upon it. Many settlements are based on global figures which do not differentiate between base costs and success fee. The Regulation does not deal with this situation.
74. The Government's stated purpose in issuing the CFA regulations was consumer protection. In relation to base costs, clients were already fully protected by the provisions of the Solicitors Act 1974 and CPR 48.8 and 48.10. The regulations focussed on the success fee element. The heading of regulation 3 makes this clear:

"Requirements for contents of Conditional Fee Agreements providing for success fees"

There are no provisions parallel to regulations 3(2)(b) and 3(2)(c) relating to CFAs which do not provide for success fees. In those circumstances, I accept the arguments put forward by Mr Morgan which I have already set out.

75. Although Mr McLaren attacks the CFA on the basis that no proper explanation has been given in relation to the £50,000 provision, if the CFA is to survive at all, it can only be on the basis that either the Deed of Variation or severance is effective. In either case, the offending words would be removed and no explanation other than the standard one need be given in respect of the CFA.
76. If the offending words do survive and to the extent that Mr Morgan accepts that there have been breaches, ie of regulations 3(1)(a), 3(2)(b) and 3(2)(c) he relies on their having been no materially adverse effect. That submission fails for the reasons which I have already given in respect of the main preliminary issue. In addition it is clear that the true effect of including that provision in the CFA has not been adequately explained to Mr Oyston. I accordingly find that there have been departures from the statutory requirements and that those departures have had a materially adverse effect both on the protection afforded to the client and upon the administration of justice.
77. If the offending words have been effectively excised by the deed of variation or by severance, such breaches as there may have been have not had any materially adverse effect.