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
		14 March 2008

Master O'Hare:

1. The difficult issue I have to address in this case is this: can a client obtain a refund of payments made to her solicitors under a conditional fee agreement (CFA) which is unenforceable because of non-compliance with the CFA Regulations which relate to it?
2. The Claimant in these proceedings is also the Claimant in a personal injury action now proceeding in the Central London County Court. The bills now before me for assessment were delivered to the Claimant by the Defendants who were, until recently, acting for her in the conduct of the personal injury action. On 12 June 2007 I directed the detailed assessment of all but the first two bills which the Defendants had delivered to the Claimant and gave timetable directions for that detailed assessment.
3. The bills sent for detailed assessment total £45,385.08. That total includes a sum not exceeding £11,000 in respect of disbursements, including VAT thereon, some, if not all, of which have been paid. The first two bills (which were not sent for detailed assessment) total £4,690.32 including £308.75 in respect of disbursements including VAT thereon. In respect of all of the bills the Claimant has already paid the Defendants sums which have not yet been agreed or assessed but which are in the region of £37,000.
4. The detailed assessment was first listed for hearing before me on 24 September 2007. At that hearing the Claimant was represented by Mr Gibson and the Defendants were represented by Mr Friston. Mr Gibson raised two preliminary points of dispute: (i) there was no valid contract of retainer between the parties and therefore the Claimant had no liability for costs. Alternatively (ii) if the retainer was valid, the Claimant's liability under it was nevertheless postponed until she achieved a successful outcome of her personal injury claim. Both points were said to arise from the terms of the engagement letter dated 28 April 2005 which the Defendants sent to the Claimant at the outset of their instructions. That letter summarised the instructions and referred to a copy of the Defendants' terms and conditions which were enclosed with the letter. Under the heading "Fees" the letter specified the hourly rates which would be payable, required a payment of £750 on account and then stated as follows:

"In the event that your claim is successful (which is likely given that liability for the incident has already been admitted), we will limit our costs to the amount recovered from the Defendant."

5. For the Defendants, Mr Friston submitted that, although at the outset they had thought they were entering into a standard retainer with payments on account (as provided for in their printed terms and conditions) the Defendants now accept that the letter dated 28 April 2005 made their entitlement to fees conditional upon success in the personal injury proceedings. At my invitation the parties then endeavoured to compromise these proceedings on the basis of terms which would have included a part refund to the Claimant, the entry into a new retainer agreement in substitution for the original retainer and the giving of a notice of acting in the personal injury proceedings by which the Defendants would return to the record on behalf of the Claimant.
6. Both parties now accept that the hoped for compromise will not materialise and therefore I am not to consider it further until the question of the costs of these proceedings falls to be decided.
7. The detailed assessment next came before me on 22 January 2008. On this occasion the Claimant was represented by Ms Rushton, acting pro bono, and the Defendants were again represented by Mr Friston. Mr Friston informed me that the Defendants no longer wished to pursue any claim for outstanding profit costs and indeed were content to refund any profit costs already paid under the bills sent for detailed assessment. He therefore invited me to assess any unpaid disbursements and all profit costs claimed in the bills at nil and to proceed to assess only the reasonableness of the paid disbursements claimed. For the Claimant Ms Rushton submitted that, in the circumstances, the Claimant was entitled to a refund of all the monies she had paid to the Defendants, whether for profit costs or disbursements, and not just in respect of the bills sent for detailed assessment but also in respect of the first two bills, which were not sent for detailed assessment.
8. This is my decision on the two points of principle which were argued before me at that hearing.

i) In respect of the bills sent for detailed assessment should I assess all disbursements, including paid disbursements, at nil?

ii) In all the circumstances should any order I make in these proceedings relate to all of the bills delivered by the Defendants to the Claimant, not just the bills sent for detailed assessment?

9. In the light of the concessions and other submissions made by Mr Friston I make this decision on the basis that the contract of retainer between the parties amounts to a CFA which is unenforceable because of non-compliance with such of the Regulations governing conditional fee agreements as apply to it.

IS THE CLAIMANT STILL LIABLE FOR PAID DISBURSEMENTS?

10. On this issue Mr Friston drew my attention to the well known passage in Hollins v Russell [2003] EWCA Civ 718 in which the Court of Appeal gave guidance as to the effect of the CFA Regulations and as to the consequences of departure from them. It is convenient to set out here in full paragraphs 113 to 116 of the judgment of the court in that case:

"113. Before leaving the subject of compliance, we should mention two other points which were discussed during the hearing and upon which there appeared to be common ground. They are not necessary to our decision but they could be of considerable importance in practice. They relate to the recoverability of the ATE premium and any disbursements which the client has in fact paid "up front" whether personally or by taking out a loan to do so.

114. Section 29 of the Access to Justice Act 1999 provides that:

"Where in any proceedings a costs order is made in favour of any party who has taken out an insurance policy against the risk of incurring a liability in those proceedings, the costs payable to him may, subject in the case of court proceedings to rules of court, include costs in respect of the premium of the policy."

It will be seen, therefore, that ATE insurance premiums are recoverable as costs in any proceedings, irrespective of whether or not there is a CFA between the receiving party and her legal representatives. The client's liability to pay the insurance premium arises from the contract of insurance, not from her contract with the legal representative. It arises whether or not there is a CFA and whether or not the CFA is enforceable. The CFAs which we have seen refer to the possibility of such insurance, but do not make it a term of the contract that such insurance is taken out. It would appear, therefore, that there is no bar to the recovery of the ATE insurance premium as costs whatever may be the bar to the recovery of the lawyers' charges and success fee.

115. Secondly, it is not uncommon for the client to put the solicitor in funds for the purpose of paying disbursements, for example the fees of medical or other experts. The funds may be provided either from the client's own pocket or financed by a loan to the client for which the client is legally responsible irrespective of the fate of the CFA. The solicitor is required to retain this money on clients' account until it is expended in accordance with the client's instructions. If the CFA fails, and the money has not been paid out, the solicitor would be required to pay it back to the client. If the money has been paid out, then this is money actually paid by the client. Mr McLaren accepted that this should be recoverable by the client as costs. The costs claim is that of the client, not of the solicitor. If the client has actually paid a debt to a third party, properly incurred in the conduct of the litigation, there seems no reason why this should not be recoverable from the paying party, insofar as it is reasonable and proportionate. (If a debt to a third party has been properly incurred, the paying party will not have to reimburse it until it has in fact been paid, but at that point it will become money actually paid by or on behalf of the client and thus recoverable from the paying party.) This is irrespective of whether the solicitor can enforce the CFA for his charges and success fee.

116. These two propositions would go a long way to remove any detriment suffered by the lay client as a result of a CFA being found unenforceable in costs proceedings. The client can recoup his or her own expenditure on the proceedings from the paying party. The true interests in the cases before us, therefore, are those of the solicitors rather than the clients. That does not in any way invalidate the conclusions to which we have come."

11. Mr Friston argued that if (as is likely) the Claimant subsequently obtains an order for costs in the personal injury claim she will be entitled to recover the disbursements she has paid even though a claim for profit costs under the unenforceable retainer would be bound to fail.
12. At the hearing I drew Mr Friston's attention to the decision of Garland J in Aratra Potato Co v Taylor Johnson Garrett [1995] 4 All ER 695. In that case the solicitors were retained in respect of various matters on behalf of a client on terms specifying hourly rates but providing also for "a 20% reduction from solicitor/client costs for any lost cases". Garland J held that the agreement amounted to a contingency fee agreement which was unenforceable as being contrary to public policy and he rejected the argument made on behalf of the solicitors that the agreement could be saved by severing the words I have set out above in quotation marks. In the result he held that the clients were not liable for unpaid bills but, where bills had already been paid, the clients were not entitled to a refund. It is convenient to set out in full the relevant passages from that decision:

"Bills paid

Can it be said that the plaintiffs are entitled to recover their money because the consideration has wholly failed, being a consideration contrary to public policy or rendered under a contract which was void? If so, should such recovery only be on terms allowing TJG [the solicitors] some remuneration including disbursements and profit? Can the concept non in pari delicto apply and, if so, what remedy would be open to the plaintiffs? I freely admit to finding these matters of the greatest difficulty. There is no clear guidance to be found in the authorities or in the textbooks. To allow the plaintiffs to recover but on terms would in effect be to allow TJG to recover on a quantum meruit if not to enforce the agreement. This cannot be right. Conversely, can it be a correct approach to take the view that the agreement is unenforceable and that the parties must therefore be left in the position in which they find themselves? This would enable TJG to take advantage of the champertous agreement dependent upon the plaintiffs' discovery of its true nature. Conversely, is justice done by allowing the plaintiffs to take advantage of the services rendered by TJG without having to pay for them? One aspect of the law is tolerably clear, and that is, where property or goods are transferred under an illegal transaction or a lease granted for an illegal or an immoral purpose, the property will pass and an estate be created (see Feret v Hill (1854) 15 CB 207, [1843–60] All ER Rep 924, Belvoir Finance Co Ltd v Stapleton [1970] 3 All ER 664, [1971] 1 QB 210 and Tinsley v Milligan [1993] 3 All ER 65, [1994] 1 AC 340).

At the end of the day I take the view that, subject to any question of severance, where services have been rendered and paid for under an unenforceable contract in circumstances where it cannot be suggested that the payee has, apart from entering into the agreement, acted unconscionably towards the payer or been unjustly enriched at his expense, it is unreal to hold that the consideration, albeit one contrary to public policy, has wholly failed and that the plaintiff is entitled to recover the price of those services while retaining the benefit of them. The better rationale is that the champertous agreement is unenforceable rather than void or voidable. This view appears to be consistent with Re Hutley's goods and Cole v Booker (1913) 29 TLR 295. In Rees v De Bernardy [1896] 2 Ch 437 there are references to 'champertous and void' but the agreement was apparently treated as voidable and set aside on the grounds of undue influence. Ratification was argued and negatived on the grounds that the co-heiresses at law never knew of their right to rescind the agreement. There could not have been any question of rescinding a void agreement.

Severance

Mr Spearman [counsel for the solicitors] 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 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.

I therefore conclude as follows: (1) the plaintiffs are not liable for unpaid bills; (2) where bills have been paid, the parties must remain where they find themselves."

13. I invited Mr Friston to consider whether he wished to rely upon that decision in support of a submission that the Claimant was not entitled to any refund of sums she had already paid, save to the extent she could show those costs to be unreasonable. After a short adjournment for him to take instructions, Mr Friston confirmed that the Defendants still did not wish to receive or retain the profit costs claimed in the bills sent for detailed assessment. By the end of the hearing Mr Friston had made it clear that his clients' concession as to these profit costs and unpaid disbursements if any was for the purposes of this action only and did not amount to a general concession that the Claimant had a right to any such refund.
14. For the Claimant, Ms Rushton argued that I should assess the disbursements as well as the profit costs at nil and the Claimant should therefore receive a full refund. The Defendants had conceded that the retainer agreement did not comply with the relevant CFA Regulations. Section 58(1) of the Courts and Legal Services Act 1990 provides that conditional fee agreements which do not satisfy all of the conditions applicable to it by virtue of that section are unenforceable. Section 58(2) defines conditional fee agreements as an agreement which provides for fees and expenses. Thus, if the entitlement to fees (in other words profit costs) is unenforceable then the solicitors' entitlement to expenses (in other words disbursements) is equally unenforceable. She argued that the ruling in Aratra had been overtaken by developments in CFA law and was now irrelevant. A variety of reasons was given for saying the ruling in Hollins v Russell, which Mr Friston relied on, was irrelevant in this case. Firstly it was a ruling made by way of concession. Also, it did not form part of the ratio decidendi. In any case she submitted that I should regard it as a special exception which applies only on the assessment of costs between litigants.
15. Ms Rushton also submitted that the Claimant's position was not inconsistent with the ruling in Hollins v Russell. Although the Claimant might later be able to claim paid disbursements from the defendant in the personal injury claim, she preferred not to do so. Even if she is subsequently awarded costs, the Defendant in the personal injury claim will not be required to pay any disbursements included in the bills delivered by the Defendants in these proceedings if, as she intends, the Claimant will by then have obtained a refund in respect of those payments.

MY DECISION ON THE REFUND OF PAID DISBURSEMENTS POINT

16. A detailed assessment leads to an order for payment (or repayment) in respect of costs claimed in the bills sent for detailed assessment. In making a detailed assessment in this case I must take into account all rights and liabilities the solicitors and client have, contractual or otherwise, which may affect the amount ordered to be paid (or repaid). That includes a determination whether the rulings in the Aratra case are applicable in this case, even though, in fact, the Defendants are not seeking to retain the profit costs paid to them.
17. At the hearing one possible distinction between Aratra and this case was raised: in Aratra the payments of costs had been made by the clients in compliance with the agreed terms; in this case the payments had been made under the mistaken impression that the solicitors were entitled to the payment of profit costs prior to a satisfactory conclusion of the claim. For myself, I do not think that that distinction would, by itself, lead to a different result in this case. Ordering a refund of costs because the solicitor had no contractual right to receive them in advance would seem to me to amount to the enforcement of rights under an unenforceable contract.
18. However, there are two other matters which I think do distinguish Aratra from this case. First, that which makes the contract unenforceable in this case is non-compliance with the relevant CFA Regulations. As to those Regulations the parties are not in pari delicto; the non-compliance is that of the solicitors, not the client (see further Kiriri Cotton Co Ltd v Dewani [1960] AC 192, cited in Aratra). The second distinction is that in this case the contract between solicitor and client related to the conduct of litigation (the personal injury claim) which has not yet concluded. In Aratra the refund of payments sought related substantially if not wholly to payments made in the conduct of litigation which had concluded. Halsburys Laws of England cites case law authorities for the following proposition:

"Where an illegal contract is still executory, the general rule of non recovery of money or property is displaced and a party may recover such items provided he repents and withdraws from the illegal purpose and gives notice repudiating the contract before he brings the action" (Halsburys Laws of England Vol 9(1) para 886).

19. I therefore accept Ms Rushton's submission that the reasoning and result in Aratra is not applicable to this case. However, having considered the matter at some length I have reached the conclusion that the ruling in Hollins v Russell relied on by Mr Friston nevertheless provides a separate reason for saying that the Claimant is not entitled to a refund of paid disbursements. In Hollins v Russell the Court of Appeal gave guidance which, in my judgement, I should apply without hesitation even though it was based upon a concession and was obiter in that case: paid disbursements properly incurred in the conduct of litigation are recoverable from a paying party insofar as they are reasonable and proportionate, even where the CFA under which they were payable by the client is unenforceable. Whilst, by its nature, the ruling applies as between litigants, I do not accept that it is a special rule which does not apply as between solicitor and client. Such a rule would be inconsistent with the indemnity principle which holds that the costs recoverable from an opposing litigant can never exceed the costs the successful litigant was liable to pay. In Hollins v Russell the Court of Appeal made clear that, where a CFA fails, the solicitors are required to pay back to the client any monies held on client's account but are not required to pay back any monies expended in accordance with the client's instructions.
20. In my judgement the Claimant is not entitled to a refund in respect of the disbursements paid under the unenforceable retainer. These disbursements (for example, payments to third parties such as counsel and experts) are not in any way tainted because of the Defendant's non-compliance with the relevant CFA Regulations. The principle of agency which underlies the Hollins v Russell ruling is important. These third parties have performed the services for which they were instructed. Had the Claimant paid them directly her expenditure would not be recoverable from the Defendants unless the amounts paid were unreasonable. Why should the position be different merely because the third parties were paid via a person with whom the Claimant has an unenforceable retainer? In my judgement, subject to questions of quantum, the Claimant ought not to expect a refund of monies she has provided for the services and similar benefits which she has received from third parties.

SHOULD MY ORDER BE LIMITED TO THE BILLS SENT FOR ASSESSMENT?

21. In her original Part 8 claim the Claimant sought detailed assessment of all the bills delivered to her by the Defendants in respect of her personal injury claim. At the hearing I ruled that the first two of those bills amounted to statute bills which had been paid more than 12 months prior to the issue of the Part 8 claim. Section 70(4) of the Solicitors Act 1974 prohibits the detailed assessment of such bills and I therefore refused to send them for detailed assessment, but I did send all the subsequent bills.
22. In the circumstances which have now arisen the Claimant invites me to review my earlier order so as to include the first two bills. Ms Rushton argues that, because of the Part 8 application, the court is seised of all of the bills and argues that the Defendants' case on this point is somewhat inconsistent. If they concede the refund of profit costs under the bills sent for detailed assessment, why do they refuse to refund the profit costs under the first two bills?
23. For the Defendants, Mr Friston argues that the court is not presently seised of the first two bills. The scope of the proceedings now before the court is the detailed assessment of specified bills. The fact that the Claimant also wanted the detailed assessment of two further bills is, he says, not to the point. The decision to exclude them was made at a previous hearing from which there has been no appeal.
24. I am in no doubt that the scope of any order I can make in these proceedings is presently limited to the bills sent for detailed assessment. Unless the order for detailed assessment is varied the Defendants are not called upon to answer for any aspect of the earlier bills in these proceedings even if they may subsequently be made to provide such answers in other proceedings.
25. The next question for me to decide is whether I should now widen the scope of these proceedings by varying the order I previously made for detailed assessment. I am not persuaded that it would be right for me to do so.
26. The court's power to revoke an order it has previously made is set out in CPR 3.1(7) which is in the following terms:

"The power of the court under these rules to make an order includes a power to vary or revoke the order."

27. Guidance upon the exercise of that power has recently been given by Patten J in Lloyds Investment (Scandinavia Ltd) v Christen Ager-Hanssen [2003] EWHC 1740 (Ch). I shall set out a quotation from that case which was cited with approval by the Court of Appeal in Collier v Williams [2006] EWCA Civ 20:

"Although this is not intended to be an exhaustive definition of the circumstances in which the power under CPR Part 3.1(7) is exercisable, it seems to me that, for the High Court to revisit one of its earlier orders, the Applicant must either show some material change of circumstances or that the judge who made the earlier order was misled in some way, whether innocently or otherwise, as to the correct factual position before him. The latter type of case would include, for example, a case of material non-disclosure on an application for an injunction. If all that is sought is a reconsideration of the order on the basis of the same material, then that can only be done, in my judgment, in the context of an appeal. Similarly it is not, I think, open to a party to the earlier application to seek in effect to re-argue that application by relying on submissions and evidence which were available to him at the time of the earlier hearing, but which, for whatever reason, he or his legal representatives chose not to employ."

28. The circumstance which the Claimant can rely upon as amounting to a material change of circumstance is the Defendants' concession that their retainer was unenforceable. At that stage I, in common with the parties, was misled into thinking that the retainer under which all the bills were delivered was an enforceable retainer. On reviewing my order in the light of that change I remain of the view that the earlier bills are not fit for detailed assessment. Section 70(4) of the Solicitors Act 1974 prohibits the detailed assessment of such bills. In those circumstances, the Defendants' failure to make their concession earlier has not misled me into refusing to order detailed assessment of the first two bills. In truth, the concession appears only to have altered the remedies which the Claimant may now wish to seek. Had she known then what she knows now she might not have sought detailed assessment at all but instead brought a general claim for restitution of monies had and received. In my judgment the Claimant should not now be permitted to turn her application for detailed assessment under the Solicitors Act into a general claim for restitution of monies had and received because a claim for such remedies could not have been commenced in the Supreme Court Costs Office.

NEXT STEPS

29. I will now hear argument as to the sums I ought to allow in respect of the disbursements claimed in the bills sent for detailed assessment. This will involve determining any disputes as to whether any disbursements have not yet been paid by the Claimant. Once that is done I will then settle the cash account, that is to say the sums paid by the Claimant on account of the bills sent for detailed assessment. Thereafter I will deal with any requests for permission to appeal and the costs of these proceedings.