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

IN THE HIGH COURT OF JUSTICE
SUPREME COURT COSTS OFFICE

		Clifford's Inn, Fetter Lane London, EC4A 1DQ
		30 August 2007

Master Gordon-Saker :

1. This judgment relates to the following issues which arose at the outset of the detailed assessment of the Claimant's bill of costs:

i) Whether the conditional fee agreement entered into between the Claimant and his solicitors is one to which regulation 3A of the Conditional Fee Agreements Regulations 2000 applies.

ii) Whether there was any breach of the 2000 Regulations on the part of the Claimant's solicitors.

iii) If so, whether the breach was material such that the agreement is thereby not enforceable.

iv) If the agreement is enforceable, whether the success fee claimed is reasonable and, if not, what the reasonable success fee would be.

The background

2. By a consent order dated 10^th August 2006 the Claimant, Mr Galitzky, is entitled as against the Defendant to his reasonable costs of a professional negligence action up to 10^th July 2006 to be assessed if not agreed.
3. In order to fund that action, on 7^th March 2005 the Claimant and his solicitors, Teacher Stern Selby ("TSS"), entered into a conditional fee agreement. That agreement is in the form of a letter and, if it follows a model form of agreement, it is not a model that I have seen before.
4. It was agreed that the Claimant would fund the disbursements and under the heading "disbursements" the agreement, at paragraph C2, provided that:

"These are Court fees, Counsel's fees, expert witness fees, photocopying and other out of pocket expenses when these are incurred. Wherever possible, we shall provide you with an estimate of the amount.

This means that the Disbursements in relation to this matter will be due and payable whether or not you are successful in your claim. We will invoice these at an appropriate time after they are incurred together with any VAT and we may seek such Disbursements on account from you. You have agreed to provide us with £15,000 on account of disbursements as described above. Any disbursements above and above this [sic] will be discussed with you."

5. At paragraph C4 the agreement defined the "success fee" as:

"This is a further amount calculated at 175% of our Time Costs. The Time Costs, the Success Fee, Disbursements and VAT are not intended to relate to the amount of damages you are awarded, or could be."

Then, following 5 factors which the success fee is said to represent:

"The matters at 4.1 and 4.2 together make up 15% of the increase on Time Costs. The matters at 4.3-4.5 make up 75% of the increase on complexity. Thus, the total Success Fee is 90%."

6. It is not in issue that the reference to "175%" is a typographical error and should read 75%.
7. Paragraph D sets out the "consequences of a successful claim". Under the sub-heading A "Normal" Win the agreement provided:

"If you win your case, this means that the High Court makes a positive Order in your favour either by way of agreement or pursuant to a judicial termination. This will happen when your opponent is not allowed to appeal or has failed to appeal in time or has lost any such appeal. When this arises:-

You are liable to pay such of our Time Costs and Success Fee as are ordered by the Court to be recovered from your opponent.

….

It is important that you realise that it may ultimately not be possible to recover our Time Costs, Disbursements or Success Fee (or your damages) from your opponent despite any order that may be made by the Court. On this basis it is important that you understand that you are still liable to pay us any amount that has been ordered to be paid by your opponent by the Court. However, we have the right under the terms of this letter to take enforcement action to recover those costs in your name and the charges of that action will become part of our Time Costs. We cannot, of course, guarantee that recovery action will be successful. Although, given that the respondent in this action is a government department it is likely that any costs that they are ordered to pay will be paid.

…."

8. The references to "respondent" and "government department" are clear mistakes and are presumably the relics of a previous agreement.
9. At paragraph E "The Consequences if your Claim is Unsuccessful" are described:

"We would define an unsuccessful claim, or a loss, as a situation where a Court has dismissed your action or you have brought it to an end on advice.

Should this happen, you do not have to pay any of our Time Costs or the Success Fee. You do have to pay us for our Disbursements and you will have to pay your opponent's legal charges and Disbursements, and possibly any success fee they may have agreed with their solicitors."

Regulation 3A

10. Although the Conditional Fee Agreements Regulations 2000 have been repealed they nevertheless apply to this agreement. Regulation 3A^[1] introduced what is commonly known as "the CFA-lite" (which, I agree with Counsel, is an unattractive term). The importance of it for present purposes is that an agreement to which the regulation applies is exempted from the requirements of regulations 2, 3 and 4. Accordingly, to avoid the Defendant's challenges, the Claimant argues that the agreement between him and TSS was one to which regulation 3A applied.
11. Regulation 3A(1) provides that:

"This regulation applies to a conditional fee agreement under which, except in the circumstances set out in paragraphs (5) and (5A), the client is liable to pay his legal representative's fees and expenses only to the extent that sums are recovered in respect of the relevant proceedings, whether by way of costs or otherwise."

12. Paragraphs (5) and (5A) cover the circumstances in which a client or his estate may be liable regardless of recovery from the opponent if there has been a failing on his part or in the event of his death.
13. The Defendant argues that the agreement in the present case cannot be one to which regulation 3A applies because the Claimant is liable to pay the disbursements whether he wins or loses and whether or not he recovers them from the Defendant. Thus, it is said, this is not a case where:

"the client is liable to pay his legal representative's fees and expenses only to the extent that sums are recovered in respect of the relevant proceedings, whether by way of costs or otherwise".

14. Mr Farber, for the Claimant, submitted that the disbursements for which Mr Galitzky was liable regardless of the outcome were not in fact part of "his legal representative's fees and expenses"; and "recovered", he suggested, must be construed as "ordered to be recovered".

Expenses and Disbursements

15. "Expenses" are not defined in the 2000 Regulations. Using general principles of construction, the word should be given its ordinary meaning. The Shorter Oxford English Dictionary (3^rd ed.) defines "expense" as:

"The action of expending; the state of being expended; disbursement; consumption; loss".

16. Mr Farber sought to draw a distinction between a solicitor's out-of-pocket expenses (taxis, couriers and the like) and sums paid by the solicitor on behalf of the client by way of disbursement (counsels' fees, experts' fees and the like). Only the former, he submitted, could fall within the category of expenses for the purposes of regulation 3A.
17. I accept of course that a disbursement is a sum paid on the client's behalf: see the definition of "disbursements" in the Solicitor's Accounts Rules 1998, rule 2(2)(k) and the definition suggested by Sir Gordon Willmer in Buckland v Watts^[2]:

"… disbursements: that is to say, money which he has actually had to pay out to other people, such as witnesses, counsel, professional advisers and so forth".

18. That "disbursements" may have a limited meaning does not, to my mind, mean that disbursements and expenses are mutually exclusive. Indeed the definition of disbursements in the agreement in this case expressly included "photocopying and other out of pocket expenses".
19. For the purposes of this judgment it is not necessary for me to attempt to define "expenses" but, giving the word its ordinary meaning, it seems to me that it would describe those sums spent by the solicitors in relation to the case other than those sums for which they would be remunerated by way of their profit costs. Their usual overheads would form part of their profit costs. Sums paid to others specifically for this case would be part of their "expenses". Thus I would include their disbursements as part of their expenses.
20. I am slightly fortified in that view by the, admittedly limited, authorities unearthed by Mr Hutton. In Munkenback & Marshall v Harold^[3], His Honour Judge Havery QC considered it:

"arguable that sums, if any, paid by the solicitor to third party suppliers, even "as agent" for the client in accordance with the terms of the conditional fee agreement, are disbursements and are expenses of the solicitor. If so, the agreement does not fall within regulation 3A."

However he decided to leave the point for full argument before the Costs Judge; an event which, it would appear, has not happened.

21. In King v Halton Borough Council, an unreported decision in Chester County Court, it was conceded before His Honour Judge Halbert that a conditional fee agreement which provided that the client would pay his own disbursements if he lost did not, for that reason, comply with regulation 3A unless it was read in conjunction with an insurance policy which covered such disbursements. In the course of his judgment, Judge Halbert referred to an unreported decision of His Honour Judge Holman in Jones v Wrexham Borough Council in which it was apparently held that the client's liability for "disbursements" took the agreement out of regulation 3A.
22. But a definition of "expenses" is not necessary for my decision in this case because the sums which the Claimant would be liable for come what may included "other out of pocket expenses" and it seems to me that these must fall within the term "his legal representative's fees and expenses" as used in regulation 3A(1) whether or not any other disbursement would also fall within the term.

Recovered

23. Mr Farber submitted that the words in regulation 3A(1) "sums are recovered in respect of the relevant proceedings" must mean "sums are determined by summary or detailed assessment" because the risk which the solicitor assumes under a conditional fee agreement is the risk of failure not the risk of non-recovery. If "recovered" means "paid to" the solicitor would be assuming a risk (the ability of the opponent to pay) which was not anticipated by the legislation.
24. Further, he submitted, such construction would accord with the indemnity principle. There must, he said, come a point at which the client is legally liable to pay his solicitor an ascertained amount of costs. This must be when the costs are assessed. For otherwise, if there were no liability by the client to pay until the costs had been paid by the opponent, the court would be lending its enforcement procedure for the recovery of a sum in breach of the indemnity principle.
25. It seems to me that "recovered" should also be given its usual meaning. To my mind it means obtaining physical possession rather than obtaining a right to possession. I can see no objection to a solicitor assuming, under a regulation 3A agreement, the additional risk of non-recovery.
26. That is a risk which is perhaps only additional in an illusory sense. For in practice under a conventional conditional fee agreement, whatever the liability of the client, the solicitor will only receive such sums as are paid by the opponent. Under most conditional fee agreements the solicitor will assume a risk of non-recovery.
27. While, under regulation 3A, he may expressly assume that risk, he also obtains the benefit of not having to comply with regulations 2, 3 and 4.
28. Mr Farber's argument that to define "recovered" as "paid" would offend the indemnity principle is ingenious. But to my mind there is no offence. The regulation anticipates a liability of the client which is limited to that which is recovered. The amount of the client's liability is ascertained on recovery. The liability of the client and the amount recovered are coterminous. Thus nothing is recovered for which the client is not liable.
29. It seems to me that the easy answer to these questions must lie in the intention behind regulation 3A. As Judge Halbert said in King v Halton BC:

"To these points, I would add that nowadays the interpretation of legislation or delegated legislation is done on a purposive basis. The purpose of regulation 3A was to exempt the CFA from some of the regulations where there was no risk to the lay client." ^[4]

30. To my mind that must be right. The purpose of regulation 3A was to remove the consumer protection requirements of the 2000 regulations from a conditional fee agreement under which there was no possibility that the client would have to pay anything whatever the outcome. The definitions for which Mr Farber contends would leave the client with a liability for unrecovered costs and no consumer protection. That cannot have been the intention of Parliament. Had Parliament intended "recovered" to mean "assessed" or "allowed on assessment" or something along those lines, that could easily have been made plain.

Is this conditional fee agreement one to which regulation 3A applies?

31. The answer must be no. The Claimant assumed a liability to pay his solicitor's expenses (defined as disbursements in paragraph C2 of the agreement) whatever the outcome and accordingly this was not an:

" agreement under which … the client is liable to pay his legal representative's fees and expenses only to the extent that sums are recovered in respect of the relevant proceedings, whether by way of costs or otherwise."

Regulations 2(1) and 4(2)(a)

32. The Defendant contends that TSS failed to comply with regulations 2(1) and 4(2)(a) of the regulations in that the conditional fee agreement contained nothing about the costs consequences of an offer or payment under Part 36 of the Civil Procedure Rules 1998.
33. The relevant parts of the regulations provided:

"2(1) A conditional fee agreement must specify –

….

(b) the circumstances in which the legal representative's fees and expenses, or part of them, are payable,

(c) what payment, if any, is due –

(i) if those circumstances only partly occur,

(ii) irrespective of whether those circumstances occur, …

(d) the amounts which are payable in all the circumstances and cases specified or the method to be used to calculate them and, in particular, whether the amounts are limited by reference to the damages which may be recovered on behalf of the client."

"4(1) Before a conditional fee agreement is made the legal representative must –

(a) inform the client about the following matters, …

(2) Those matters are-

(a) the circumstances in which the client may be liable to pay the costs of the legal representative in accordance with the agreement, …"

34. On behalf of the Defendant, Mr Hutton submitted that this was a case in which liability was unlikely ever to be seriously in issue. The real issue was only going to be quantum and therefore the only real risk either to the Claimant or to TSS was the prospect of failing to beat a Part 36 offer or payment.
35. It seems to me that must be right. This professional negligence claim arose because the Defendant allowed an action in which they were acting for the Claimant (and ironically itself a professional negligence action) to be struck out for want of prosecution. Although liability was never formally admitted, it is highly unlikely that the issue of liability would ever be tried.
36. But it also seems to me that the likelihood of a Part 36 offer or payment does not affect the question of whether the conditional fee agreement complied with the regulations. Either it does comply or it does not.
37. In my judgment the difficulty with the Defendant's argument is that there is no evidence before me to suggest that the Claimant or TSS intended any different liability for costs in the event that a Part 36 offer or payment was not beaten than the agreement provides.
38. Obviously if a Part 36 offer or payment was beaten by the Claimant, the offer or payment would be irrelevant. The Claimant will have succeeded on his claim and, in the ordinary way, would be entitled to his costs. Clearly that would not be a particular circumstance which needed to be covered in the agreement.
39. As I read the agreement if the Claimant accepts a Part 36 offer or payment, that would be a "win". Paragraph D provided the definition of a "normal" win as:

"If you win your case, this means that the High Court makes a positive Order in your favour either by way of agreement or pursuant to a judicial termination [sic]." (emphasis added)

40. It seems to me that, under the terms of the agreement, if the Claimant succeeds at trial but fails to beat a Part 36 offer or payment, that would be counted as a "normal" win and (according to the first bullet point under paragraph D) he would be:

"liable to pay such of our Time Costs and Success Fee as are ordered by the Court to be recovered from your opponent".

41. It would be likely, in those circumstances, that the Court would not order the recovery of costs from the Defendant for the period after the Part 36 offer or payment and so the Claimant would not be liable to TSS for their costs over that period. But if, for whatever reason, the Court did order the Defendant to pay the Claimant's costs for the period after an effective Part 36 offer or payment, the Claimant would be liable to TSS for their costs over that period.
42. I cannot see why the Claimant or TSS would seek to achieve a different result than that. While there is no reference in the agreement to Part 36 offers or payments, it seems to me that the circumstances in which the fees and expenses of TSS would be payable in the event of failing to beat such a payment or offer are specified – their fees and expenses would only be payable if and to the extent that they were "ordered by the Court to be recovered from your opponent".
43. Mr Hutton quite fairly criticised the wording of the definition of a "normal" win:

"If you win your case, this means that the High Court makes a positive Order in your favour either by way of agreement or pursuant to a judicial termination".

44. Ignoring the unpleasant concept of "judicial termination" (presumably determination), it is I think difficult to anticipate quite what is intended by "a positive Order". Would an order that judgment be entered for the Claimant, but that he should pay the costs after a Part 36 payment, be a positive Order?
45. The answer, I think, can be found in paragraph E of the agreement which defines an unsuccessful claim as:

"… a situation where a Court has dismissed your action or you have brought it to an end on advice".

46. The headings of paragraphs D and E draw the distinction between "successful" and "unsuccessful" and the paragraphs are clearly designed to set out the consequences of a successful claim and an unsuccessful claim respectively. It seems to me to be clear that what was intended was that a successful claim, or a "normal" win, was one which was not unsuccessful -i.e. a claim which was not dismissed or ended by the Claimant and so resulted in a positive Order. On this analysis I do not think that there would be any difficulty in discerning whether any given claim was or was not a win.
47. In my judgment it was not necessary further to specify any consequences of failing to beat a Part 36 payment, because that would be a "normal" win and the Claimant would be liable to pay the fees and expenses of TSS to the extent that the Court ordered them to be recovered.
48. Accordingly there was no breach of regulation 2.
49. A copy of an attendance note dated 7^th March 2005 is exhibited to the first witness statement of Mr Rabinowicz. He was the partner at TSS with conduct of this action. The note records an attendance in person on the Claimant and Mr Rothschild, a friend of the Claimant. According to the note:

"I went through with them the draft CFA letter and explained to them my thinking as to the percentages both as to time delay and to complexity. I explained the system."

50. Taken at face value (and having regard to paragraph 5 of his first witness statement) Mr Rabinowicz explained to the Claimant that he would be liable to pay TSS's fees and expenses only in the event of a win (which, on my analysis, would include success but failing to beat a Part 36 payment or offer) but only to the extent that such costs were ordered by the Court to be recovered from the Defendant. In my judgment, that is sufficient to comply with regulation 4(2)(a). The Claimant was told that he will only be liable for costs which the Defendant is ordered to pay (whether or not they are actually recovered) and there are no consequences therefore of a Part 36 offer or payment. According to paragraph 8 of Mr Rabinowicz's first statement:

"It was explained to the Claimant that under the terms of the CFA, where a Part 36 proposal is tendered by the Defendant and not bettered at trial, whether or not TSS had advised acceptance, the client would not be liable for the fees of TSS for any period in which the Defendant was awarded costs, although he would be liable for the costs of the Defendant for such a period."

51. I observe in passing that whether or not this agreement was one to which regulation 3A applied is of no practical effect on this aspect, for regulation 3A(4)(a) applies a similar requirement to regulation 3A agreements to that contained in regulation 2(1)(b).

Regulation 4(2)(c)

52. In the Points of Dispute the Defendant questioned whether TSS had made adequate enquiries as to whether the Claimant had before the event insurance which would cover this claim before entering into the conditional fee agreement.
53. The first statement of Mr Rabinowicz sought to address that question amongst others. To my mind the relevant passages are:

"The Claimant was an elderly gentleman, in poor health, and was extremely disenchanted with the legal system … and had no other means of funding the litigation after our investigations into potential LSC funding proved fruitless. …

Public funding had been refused to the Claimant and no before the event legal expenses insurance was available to the Claimant."

54. Anticipating that this explanation may not be sufficient, Mr Farber sought permission to call Mr Rabinowicz to give evidence, which I allowed.
55. Mr Rabinowicz explained that his usual practice was to enquire about the existence of BTE cover in the client care letter and at the initial meeting. However because the Claimant lived in Antwerp he had asked the Claimant and Mr Rothschild before the meeting on 7^th March 2005 to check what insurance cover he had with specific reference to house insurance. Although he thought it unlikely that a Belgian policy would cover a claim here, he asked the Claimant to check whether his household policy would cover the claim. He asked both whether the Claimant had legal expenses insurance and whether it would cover the claim. The Claimant said that he did not know and that he would check. The Claimant had then told him at the meeting that he had checked and he did not. Mr Rabinowicz did not doubt the ability of the Claimant to be able to understand whether the policy included legal expenses insurance.
56. I am happy to accept that evidence. Mr Rabinowicz struck me as a careful solicitor. Funding was clearly a concern both to him and to the Claimant. That Mr Rabinowicz's first statement did not condescend to much detail is to my mind likely to reflect only the failure to anticipate the rigour (and vigour) with which this issue would be explored.
57. Were these enquiries sufficient? In my judgment, following the guidance given by the Court of Appeal in Myatt v National Coal Board,^[5] they were.
58. As the Court made plain in Myatt regulation 4(2)(c) does not require solicitors slavishly to follow the detailed guidance given in Sarwar v Alam.^[6] What a solicitor should reasonably do to discharge his obligation will depend on the individual circumstances of the case.
59. The Claimant in the present case was elderly. English was not his first language. He spoke a mixture of Yiddish and Flemish. Mr Rabinowicz speaks some Yiddish and Mr Rothschild was able to translate when needed. The Claimant was "not the brightest client but was not stupid either".
60. Clearly he did not fall into the category of client who could be left to decide whether he had insurance which would cover this claim. He needed prompting. But in the absence of the client having purchased specific legal expenses insurance it is highly probable that the only cover that he might possibly have for this sort of claim would be in a household policy. And Mr Rabinowicz specifically asked him whether he had legal expenses insurance and to check the household policy.
61. Requiring the Claimant to bring his household policy to the meeting would presumably have been pointless for doubtless the policy would not have been written in English. Requiring a translation or requiring the policy to be checked by a Belgian lawyer would be unreasonable. In all the circumstances and particularly having regard to the fact that the Claimant was resident overseas, in my judgment Mr Rabinowicz did discharge his duty under regulation 4(2)(c).

Was there any breach of the 2000 regulations on the part of the Claimant's solicitors?

62. In my judgment there was no breach and there is no reason why the conditional fee agreement entered into by the Claimant and TSS is not enforceable.

Materiality

63. It follows that it is not necessary for me to decide whether any breach was material. I anticipate that had I concluded that there had been a breach of regulation 4(2)(c) by failing to make sufficient enquiry, I would have found that breach to be material. I doubt that I would have found the alleged breach of regulations 2(1) and 4(2)(a) to be material because the Claimant's liability to pay TSS would and should have been clear to him, despite such breach.

The success fee

64. The conditional fee agreement provided for a 75% success fee to reflect the risks of failure and that is what is claimed in the bill against the Defendant. That would reflect a 57% chance of success.
65. In my judgment that was unduly pessimistic. This claim was highly likely to succeed on liability. Indeed it is highly unlikely that liability would be tried. The only risk therefore was on quantum and, specifically, the risk of failing to beat a Part 36 payment or offer.
66. I accept that quantum would be difficult in this case. What was lost was the Claimant's loss of the chance of success in his professional negligence claim against his former solicitors. What was lost in that claim was the loss of a chance that he would have successfully defended an action in 1993 in which the claimant (in that action) sought a declaration that the Claimant (in this action) had no interest in a property. So it was the loss of a chance of the loss of a chance.
67. Of course it could be said that a possible consequence of the difficulty of assessment is that it might be more likely that the Claimant would accept an offer. It might be less likely that he would be advised to decline offers.
68. It is relevant that no offers had been made before the conditional fee agreement was entered into. It is interesting to note, but not relevant, that the first offer was made a few weeks after the agreement and that the claim eventually settled by a late acceptance.
69. This was a claim which was likely to settle. But the risk was more than minimal. While to my mind the success fee of 75% claimed is unreasonable, so is the success fee of 10% offered.
70. There is no risk assessment to assist me. It seems to me that at the time the agreement was entered into Mr Rabinowicz should have assumed that there was no real risk of failure on liability and that the only risk was that he might not recover all of his costs. In my view the prospects of success should have been put at 80%, which would justify a success fee of 25%.

Note 1   inserted by the Conditional Fee Agreements (Miscellaneous Amendments) (No 2) Regulations 2003    [Back]

Note 2    [1970] 1 QB 27 at 37G;’ and see the debate in Agassi v Robinson [2005] EWCA Civ 1507 at para 67 ff.    [Back]

Note 3   [2005] EWHC 356 (TCC) para 29    [Back]

Note 4    At para 5.8    [Back]

Note 5   [2007] 1 WLR 554    [Back]

Note 6   [2002] 1 WLR 125    [Back]