England and Wales High Court (Queen's Bench Division) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		3 August 2005

Mr Justice Gray: Introduction

1. This is an appeal by the Defendant in the action, Burwell Reed & Kinghorn Limited, against the decision of Costs Judge Simons dated 16 February 2005 whereby he held that the Claimant, John Kitchen, was entitled to claim a success fee as from 8 July 2002 and that there had been no breach of the indemnity principle. I had the advantage that I was assisted by Assessors, namely Costs Judge Wright and Mr Peter Kirby QC.

The facts

2. I feel that I cannot improve on the Judge's recital of the facts. He said (using the paragraph numbering in his judgment):

"2. From about 1997 the Claimant was employed by the Defendants as a polisher at their factory premises in Gildersome. Throughout his employment the Claimant used vibrating tools which exposed him to harmful vibration by which he allegedly suffered loss and damage.

3. On 24 April 2001 Mr Kitchen applied to his union, the AEEU, for legal assistance with a view to seeking compensation from the Defendants.

4. On 17 May 2001 Thompsons wrote to Mr Kitchen informing him that the AEEU had asked them to contact him concerning his claim and invited Mr Kitchen to attend at their offices on 26 June 2001 in order to discuss the claim. The sixth paragraph of the letter read as follows:

'Technically, like all solicitors' clients you are liable for your legal costs, however the union will indemnify you i.e. pay all legal costs for you – provided you continue to satisfy the conditions of the legal assistance scheme as set out in the Union Rule Book.'

5. The letter went on to deal with other issues, namely identifying the person dealing with the case and advising Mr Kitchen as to the firm's complaints procedure.

6. On 1 June 2001 Thompsons signed a Collective Conditional Fee Agreement ("the CCFA") with the AEEU.

7. After having obtained a medical report relating to Mr Kitchen's injuries, Thompsons sent a letter of claim to the Defendants on 14 December 2001. The penultimate paragraph of the letter stated:

'This claim is funded by a collective conditional fee agreement. This funding arrangement includes additional liabilities as provided by CPR rule 43.2 which will be recoverable from you on the successful conclusion of this claim.'

8. Between 17 May 2001 and 8 July 2002, Thompsons did not send any letters to Mr Kitchen either advising him of the existence of the CCFA or relating to any change of funding arrangements. On 8 July 2002 Thompsons wrote to Mr Kitchen as follows:

'As a result of changes in the law, I now need to review the position further with regard to the funding of your claim.

I previously explained that, technically, like all solicitors clients you are liable for your legal costs, however the union will indemnify you i.e. pay all legal costs for you provided you continue to satisfy the conditions of the union's legal assistance scheme.

I also confirmed that the law allows the union to cover your costs and any costs payable by you to the other side by way of a collective conditional fee agreement so long as membership of the union continues and we are instructed. I have accepted their instructions to act for you accordingly. The service which we provide is governed by the terms of our collective conditional fee agreement with the union which provides that we are entitled to stop acting for you under the union's legal assistance scheme if membership of the union ceases. Further if you choose to instruct other lawyers you will become responsible for your own costs and the other side's costs from that time onwards.

Up until now the collective conditional fee agreement has applied to your case but it has not been possible to provide insurance for the costs not covered directly by that agreement e.g. your opponent's costs and expenses incurred on your behalf such as medical fees, etc. Your liability for these costs has been covered by direct indemnity from the union as outlined above.

As insurance approved by the union is now available for these costs, this direct indemnity will shortly be replaced with a personal policy of insurance to cover you in respect of such costs. To ensure complete protection for you the union will still indemnify you in respect of your liability for this insurance premium.'

9. The letter continued with a request to Mr Kitchen to complete a questionnaire relating to any pre-existing legal expense insurance. The final paragraph of the letter read:

'If you would like any further explanation, advice or other information about legal costs, the funding arrangements for your case or any other matter please do not hesitate to ask.'

10. The letter contains no reference to any other enclosures with the letter apart from the insurance questionnaire.

11. On 20 July 2002 proceedings were issued in Leeds County Court. The claim form had been settled by counsel.

12. On 20 January 2003 there was a directions hearing at the Leeds County Court.

13. On 11 March 2003 the Defendants applied for the issue and service of the proceedings to be set aside and that application was heard on 17 April 2003 when the application was dismissed with costs assessed at £900 to be paid by the Defendant.

14. On 8 May 2003, after hearing counsel for both parties, His Honour Judge Barry ordered a judgment be entered for the Claimant in the sum of £11,524.21 (inclusive of interest) and that the Defendant do pay the Claimant's costs to be assessed by detailed assessment if not agreed.

15. A short while thereafter, Thompsons served Notice of Commencement of Detailed Assessment Proceedings with the Claimant's bill of costs. The bill was divided into two parts. Part 1 was headed pre CCFA and Part 2 was headed post CCFA. A success fee of 100% was claimed in respect of the base costs in Part 2 totalling £4,972.50. The Defendant lodged Points of Dispute on 16 September 2003. Thompsons subsequently served and filed Replies to the Points of Dispute.

16. On 20 April 2004 there appears to have been a preliminary detailed assessment hearing before District Judge Jordan at the Leeds County Court when the District Judge adjourned the detailed assessment and ordered the filing of skeleton arguments.

17. On 5 July 2004 District Judge Jordan ordered that the matter be transferred to the Supreme Court Costs Office."

The issues for decision

3. The issues which I have to decide on this appeal are twofold:

i) whether the letter sent by Thompsons to the Claimant on 8 July 2002 was effective to vary the initial retainer, contained in Thompsons earlier letter of 17 May 2001, so as to incorporate the Collective Conditional Fee Agreement ("the CCFA") entered into between the Amalgamated Engineering and Electrical Union ("the AEEU") and Thompsons on 1 June 2001 and

ii) whether the effect of clause 5.8 of the CCFA, whereby Thompsons agreed not to seek to recover their charges direct from the Claimant, should be construed as an agreement on the part of Thompsons that the Claimant should have no liability to pay their costs with the result that the Defendant is not entitled to recover any costs from the Claimant since that would involve a breach of the indemnity principle. I propose to take the two issues in the order set out above.

The material provisions of the CCFA

4. Before turning to the parties' respective submissions on the first issue, however, it is convenient to set out the provisions of the CCFA which appear to us to be material:

"1.1.6 'win': a member wins an action if when it is finally determined (whether by the court or by agreement) who shall pay the costs relating to that action s/he becomes entitled to be paid by another party to those proceedings all or part of those costs.

1.1.8 'legal assistance' means the indemnity against legal costs in respect of advocacy and litigation services granted by the union to a member.

1.2.3 'disbursements' means expenses which the solicitors incur on the member's behalf in the course of an action, such as court fees, fees for experts, barrister's fees (including success fees for barristers where appropriate), copying charges made by others, travelling and hotel expenses (this is not an exhaustive list).

…

3.1 When accepting instructions under this agreement in relation to a claim the Solicitors must inform the member as to the circumstances in which the member may be liable to pay the Solicitors charges and, if the member requires any further explanation, advice or other information about that subject, the Solicitors must provide such further explanation, advice or other information as the member may reasonably require.

3.2 When accepting instructions under this agreement in relation to a claim the Solicitors must prepare and retain a written statement ("the written statement of the success fee") containing:

3.2.1 Their assessment of the probability of the circumstances arising in which the success fee will become payable in relation to that claim ("the risk assessment");

3.2.2 Their assessment of the amount of the success fee in relation to that claim, which in no case should be more than 100%, having regard to the risk assessment; and

3.2.3 The reasons by reference to the risk assessment for setting the success fee at that level.

3.3 The Solicitors shall comply with their obligations under clauses 3.1 and 3.2 by sending to the member a copy of the "Conditions of the AEEU Legal Aid" worded as set out in the document annexed to this agreement or as may be subsequently agreed by the parties to this agreement.

3.4 After accepting instructions under this agreement in relation to a claim the Solicitors must confirm their acceptance of instructions in writing to the member.

4. Liability to pay the costs of other parties

4.1 If while covered by the Union's legal assistance the member is ordered to pay the costs of any other party to the claim the Union shall pay those costs on behalf of the member provided that the member has complied with the Conditions of the AEEU Legal Aid.

4.4 The additional amount in respect of the claim for which instructions from the Union were first received by the Solicitors before the date of this agreement shall be specified both by reference to the categories specified in clause 4.3 and in addition by whether in the Solicitors' opinion the probability of the circumstances arising in which the member will become liable to pay some or all of the costs of any other party to the claim (including any counterclaim or interim dispute) has substantially increased or decreased since instructions in respect of that claim were first received by the Solicitors.

4.7 As soon as practicable after the date of this agreement the Solicitors shall notify the Union in respect of each claim for which instructions from the Union were first received by the Solicitors before the date of this agreement of which the categories specified in clause 4.3 the claim falls within, the Solicitors' opinion of the probability specified in clause 4.4 and the additional amount in respect of that claim in accordance with the then current notice given by the Union pursuant to clause 4.2.

…

5.8 The Solicitors shall not seek to recover direct from the member their charges in respect of any period during which the member was covered by the Union's legal assistance unless that legal assistance has been annulled.

6. Success

6.1 If a member wins an action the Union shall pay on behalf of the member the Solicitors' charges for the work done on that action.

7. Success fees

7.1 Subject to the following provisions of this clause the success fee shall be as specified in the written statement of the success fee and shall only apply to the work done by or on behalf of the Solicitors on or after the date of this agreement. 7.2 A member is entitled on request to a copy of the written statement of the success fee in relation to his/her claim.

8. Losing

8.1 If the member loses an action neither the Union nor the member is liable to pay any of the Solicitors charges for work done on that action save that the Union shall pay on behalf of the member such disbursements (inclusive of any VAT thereon) as were reasonably incurred prior to the date of this agreement."

5. Those contractual stipulations mirror regulations to be found in the Collective Conditional Fee Agreements Regulations, 2000. I do not find it necessary to set out the relevant Regulations; they are quoted in paragraph 19 of the Judge's judgment. Suffice it to say that regulations 4(2)(a) and (b) are reflected in clause 3.1 of the CCFA; regulation 5 is reflected in clause 3.2; regulation 4(2) is reflected in clause 3.3 and regulation 4(4) is reflected in clause 3.4.
6. It is to be noted that, in contrast to the statutory provisions relating to Conditional Fee Agreements, the Regulations governing CCFAs do not provide that a breach of the regulations in relation to a particular retainer will have the consequence that the retainer is unenforceable. It was explained to me that the reason for this is that bodies, such as unions, who enter into CCFAs were thought to be in less need of statutory protection than individuals who enter into CFAs.

The submissions for the Defendant on the first issue

7. The argument of Mr Ian McLaren QC for the Defendant ran as follows: he accepted that by virtue of the retainer letter of 17 May 2001, quoted earlier, Thompsons became entitled to their base costs for representing the Claimant in the litigation. At that time the CCFA was not in existence. As I have said, the AEEU and Thompsons entered into the CCFA on 1 June 2001. It is common ground that the next relevant communication between Thompsons and the Claimant was the letter of the former dated 8 July 2002 also quoted above. After the CCFA was entered into, Thompsons should have written to the Claimant in June 2001 explaining the implications of the CCFA for the terms of the existing retainer. Thompsons omitted to send such a letter to the Claimant because of an incorrect internal classification of the Claimant's case. For the same reason Thompsons failed at that time to comply with the requirements set out in clauses 3.1, 3.2 and 3.4 of the CCFA, which are set out above and which mirror the Regulations also referred to earlier. Thompsons also omitted to comply with clause 4.7 of the CCFA as to the information to be notified to the AEEU. The failure of Thompsons to provide the Claimant with information about the conditional fee arrangements also, Mr McLaren argues, placed the solicitors in breach of the Solicitor's Costs Information and Client Care Code 1999.
8. Against that background Mr McLaren submits that there was nothing in the letter of 8 July 2002 which was effective to vary the initial retainer of 17 May 2001. He draws attention to the fact that the letter was sent out more than a year after the CCFA was entered into. It provided virtually no information about the conditional fee arrangement and was mainly concerned with funding and insurance.
9. Mr McLaren advances a further submission on this issue, in effect bolstering his first submission, to the effect that it was a condition precedent to the incorporation of the CCFA as the basis of the retainer that the requirements of clauses 3.1 and 3.2 of that agreement were complied with by Thompsons. Mr McLaren submitted that it cannot have been the intention of Parliament when drafting the Collective Conditional Fee Agreements Regulations 2000 that a valid individual retainer could be created (or varied) in circumstances where the solicitors were in breach not only of the relevant regulations (regulation 4) but also the relevant clauses of the CCFA (clauses 3.1 and 3.2). He added that it was not open to Thompsons to seek to rectify the position long after judgment had been entered for the Claimant, as it was on 8 May 2003. Accordingly, Mr McLaren did not accept that the case of the Claimant was assisted by the fact that in January 2005 Thompsons obtained confirmation from both the AEEU and the Claimant that neither one of them would treat the breaches as a repudiation of the contract.

The submissions for the Claimant on the first issue

10. The Claimant did not cross-appeal the decision of the Judge that it was not until 8 July 2002 that the retainer was varied so as to include the CCFA. Mr Jeremy Morgan QC for the Claimant was content to restrict his client's case to the contention that the letter of 8 July 2002 did effect a variation of the Claimant's retainer of Thompsons. Mr Morgan drew attention to the reference to reviewing the funding of the Claimant's claim in the first paragraph of that letter and to the third paragraph which states clearly that the solicitors have accepted the AEEU's instructions to act for the Claimant and to provide a service governed by the terms of Thompsons' collective conditional fee agreement with the AEEU. He submitted that the terms of the letter, which the Claimant accepted by continuing to use the services of Thompsons, were sufficient to vary the retainer so as to incorporate the CCFA. In support of that submission Mr Morgan relied on the decision of the Court of Appeal in Thornley v Lang [2004] 1 WLR 378 and in particular on the passage at paragraph 20 of the judgment. Mr Kitchen, like Mr Thornley, availed himself of the services of the solicitors and thereby ratified the agreement reached by the union on his behalf.
11. In relation to the submission of Mr McLaren that clauses 3.1 and 3.2 of the CCFA were conditions precedent to the incorporation of the CCFA into Thompsons' retainer, Mr Morgan conceded that, by reason of the oversight referred to at paragraph 7 above, the requirements of clause 3.1 and 3.2 were not complied with until July 2002 (and the requirement contained in clause 3.3 was not complied with at all). But he disputed the proposition that clauses 3.1 and 3.2 were conditions precedent to the incorporation of the CCFA. Mr Morgan pointed out that they are not described as such in the CCFA and they work perfectly well as conventional contractual terms, the breach of which may, depending on the circumstances, entitle the client to repudiate the retainer. Mr Morgan added that the Regulations do not, as they might have done, spell out that the consequence of non-compliance with clauses such as 3.1 and 3.2 is that the retainer becomes unenforceable.
12. Mr Morgan suggested that there is a short answer to the Defendant's reliance on clauses 3.1 and 3.2, namely that both the Claimant and the AEEU have waived the breaches by Thompsons of their obligations under those clauses. He argues that conditions precedent can be waived just like any other contractual stipulations. He relies on the confirmation provided both by the Claimant and by the AEEU in January 2005 that they did not wish to repudiate the CCFA or otherwise complain of Thompsons' breaches.

Decision on the first issue

13. The first question to be addressed is whether Thompsons' letter of 8 July 2002 was apt to vary the retainer which it is agreed came into existence between them and the Claimant by virtue of their letter of 17 May 2001. This is a pure question of construction. I ask myself what would have been the impression conveyed to the Claimant by the terms of the letter. The first paragraph of the letter makes clear that there had been changes such as to necessitate a review of the funding of the Claimant's claim, that is, to consider whether some changes were necessary in that regard. The second paragraph indicates that the arrangement will continue to be one of indemnity. The important paragraph appears to me to be the third. The second sentence of that paragraph tells the Claimant that Thompsons have accepted the AEEU's instructions to act for him "accordingly", i.e. by way of the collective conditional fee agreement now allowed by the law and referred to in the first sentence of the third paragraph. The third sentence of that paragraph is in the same sense. I accept that the opening words of the fourth paragraph were inapposite, since Thompsons had omitted to send out the June letter explaining the introduction of the CCFA. But that cannot in my judgment displace what I consider to be the meaning which would have been conveyed to the Claimant by the third paragraph of the letter. I accept that Mr McLaren is right when he says that the balance of the letter is concerned with insurance but that is no reason in my view to displace what I consider to be the proper construction of the earlier paragraphs of the letter.
14. Of course, the retainer between a solicitor and his client cannot be varied unilaterally by the solicitor. There has to be consent. The Claimant did not expressly agree that the retainer should be varied; indeed he did not reply to the letter of 8 July 2002. On the evidence of the present case he is not someone who often puts pen to paper. No doubt he, like the vast majority of union members who become involved in litigation, trusts his union to act in his best interests. I note that the Claimant stood to benefit by the variation indicated in Thompsons' letter of 8 July 2002. There was no reason for him to reject it.
15. The question which I have to ask myself is whether it may be legitimately inferred that, despite his silence, the Claimant agreed to the proposed variation. Having read the letter of 8 July 2002, the Claimant was evidently content that Thompsons should continue to act on his behalf, as they did until judgment was obtained. Is that sufficient to infer acceptance of the variation by conduct on his part? In Thornley v Lang (op cit), the issue was whether the Defendant's insurers were liable to pay a success fee in circumstances where the requirements of the Conditional Fee Agreements Regulations 2000 had not been complied with. I recognise that the principal issue in that case was whether those regulations and the CCFA Regulations were mutually exclusive. It is nevertheless clear in my opinion that the court was prepared to infer that the Claimant client in that case had ratified the agreement reached by the union on his behalf by availing himself of the services of the solicitors. Having pointed out in paragraph 15 of the judgment that there was little indication that the Claimant had agreed to pay the solicitors a 20% success fee, Lord Phillips of Worth Matravers said at paragraph 20:

"… the agreement under which the union agreed with their solicitors that they should represent the Claimant was a CCFA. For the purposes of these proceedings it is presumed to have been a valid CCFA that complied with the CCFA Regulations. The union so agreed with the authority of the Claimant. An alternative view is that the Claimant ratified the agreement reached by the union on his behalf by availing himself of the services of the solicitors. On either footing, the contract pursuant to which he came under a liability to pay the solicitors for their services was a CCFA."

16. In the present case I am satisfied, as was the Judge, that the retainer was varied in the manner contended for by the Claimant. The solicitors' letter of 8 July 2002 conveyed sufficient information for the Claimant to know that a revised retainer was being proposed by Thompsons which would reflect the collective conditional fee agreement made with the AEEU. Given the relationship between the Claimant and his union, I do not accept that it was incumbent on Thompsons to provide further information although, if asked to do so, they would of course have been obliged to answer their client's questions. In a union case information which would normally be given to a paying client can properly be withheld from the client: Bailey v IBC Vehicles [1998] 3 All ER 570, 574C. In the light of Thornley I am satisfied that it is proper to infer from the continuance of the relationship of solicitor and client after 8 July 2002, that the Claimant ratified or accepted by his conduct the variation which had been proposed to him.
17. As to the argument advanced by Mr McLaren that no variation can have been effected because Thompsons failed to comply with clauses which were conditions precedents, I find no justification for elevating clause 3.1 or 3.2 to the status of conditions precedent. They are not so described in the CCFA and there is nothing in the Regulations which supports such a suggestion. Rather the contrary, it appears to me that by omitting to provide that non-observance of these conditions would render the retainer unenforceable, the draftsman was contemplating that the requirements would, once reflected in a collective agreement, take effect as standard contractual terms the breach of which might, according to the circumstances, give rise to an entitlement on the part of the client to repudiate the retainer or might sound only in damages. Such a conclusion appears to me to be consistent with the policy reasons for differentiating between CCFAs on the one hand and CFAs on the other hand. I accept of course that the CCFA spells out what the solicitors "must" do and that they "shall" comply with their obligations. But, as Mr Morgan correctly pointed out, contractual stipulations are invariably expressed in prescriptive terms.
18. For the above reasons, I conclude that the Judge was correct to find that the retainer was varied in the manner contended for by the Claimant. Although it is therefore unnecessary to decide the question, I should briefly record my rejection of the submission made by Mr Morgan that the Claimant and the AEEU are to be taken to have waived the breaches by Thompsons of clause 3 of the CCFA by confirming to the solicitors that those breaches were not such that they wished to repudiate the retainer. As I have said, such confirmation was not forthcoming until January 2005. His Honour Judge Barry had entered judgment for the Claimant over 18 months earlier. 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. It is true that the Claimant had not accepted the repudiation of the retainer (assuming the terms were conditions rather than warranties), so that it could be argued that the retainer continued. This contention was not advanced at the hearing. I therefore express no view about it. Subsequent to the hearing Mr Morgan very properly drew my attention to Keller v Williams (PC, unreported, 24.06.04) in which case the Privy Council upheld the decision of the court below that a variation of the retainer was not effective against the paying party. 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.

The second issue: its importance

19. By way of preface to the rival contentions in relation to clause 5.8 of the CCFA, I should mention a discussion which took place in the course of the hearing as to the importance of this issue. It appears that prior to the hearing Thompsons claimed in a letter to the Court that a great number of other cases might turn on the outcome of the present appeal. In other words, the solicitors were saying that if the Defendant is successful on the present appeal, there will be many other cases where claimants in the position of Mr Kitchen will be unable to recover a success fee. Of course this has no bearing on the outcome of the appeal. But Mr McLaren was critical of the fact that such a claim had been made, pointing out that an easy escape route for the solicitors is available under section 2 of the Contracts (Rights of Third Parties) Act, 1999. That Act, to which I will return, confers on a third party a right to enforce a term of the contract if it purports to confer a benefit on him, even if that third party is not a party to the contract. Section 2 of the Act recognises that the right of the third party may in certain circumstances be extinguished.
20. The response of Mr Morgan was that section 2 cannot be relied on as an escape route because there exists the argument that CCFAs are, at least notionally, agreements made by a union as agent for its member. If that be right, the member would not be a third party for the purposes of the 1999 Act but rather would be a party to the CCFA, as principal. If that be right, section 2 of the 1999 Act would not avail the solicitors.
21. I do not of course have to decide the point but I mention it for the sake of completeness.

The submissions for the Defendant on the second issue

22. The contention of Mr McLaren for the Defendant is that if, contrary to his argument, the original retainer was varied so as to incorporate the terms of the CCFA, the Claimant is not entitled to recover any costs from the Defendant. It is submitted that this is because clause 5.8, quoted above, provides in terms that the solicitors shall not seek to recover their charges direct from the member. If the member is not liable to pay any costs, there can be no recovery of any costs from the Defendant since that would involve a breach of the indemnity principle. The essence of the indemnity principle is that a party to litigation can only recover such costs as he is liable to pay to his own solicitor: see for example Awwad v Geraghty & Co [2001] QB 570.
23. The contention for the Defendant is that clause 5.8 is a promise by the solicitors not to sue the AEEU member for their fees. The meaning of clause 5.8 is submitted to be clear: it is to protect the Union member from the insolvency of the Union and to provide that the solicitors would be obliged to look to the Union and only to the Union for payment of their costs. Mr McLaren suggests that the reason for including clause 5.8 was to protect union members from the consequences of insolvency. Clause 5.8 confers a benefit on the Claimant, as a member of a class, and he would be entitled to enforce that right by seeking an injunction against the solicitors: see section 1(5). Mr McLaren referred me to Nisshin Shipping Co Limited v Cleaves & Co Limited [2003] EWHC 2602 at paragraph 23; Melanesian Mission Trust Board v Australian Mutual Provident Society [1997] 2 EGLR 128; Commissioners for the Inland Revenue v Raphael and others [1935] AC 96 and to The Interpretation of Contracts by Kim Lewison QC (as he then was).
24. Mr McLaren contends that the effect of clause 5.8 is that the Claimant is under no circumstances to be liable to the Defendant for costs: see Adams v London Improved Motor Coach Builders Limited [1921] 1 KB 495 and R v Miller & Glennie [1983] 1 WLR 1056. Accordingly, it is submitted, there is no need for an indemnity and the Defendant cannot be liable for costs of the claim.

Submissions for the Claimant

25. Mr Morgan joins issue with Mr McLaren as to the proper interpretation of clause 5.8 in the CCFA both when viewed in isolation and in the light of the surrounding contractual documentation. Reliance was placed on the observations of Lord Hoffman in Investors Compensation Scheme Limited v West Bromwich Building Society [1998] 1 WLR 896 at 912-3 as to the principles to be applied to the construction of contractual documents and on a dictum of Lord Steyn in R v National Asylum Support Service [2002] 1 WLR 2956: see paragraph 5 at 2958. Mr Morgan argues that the CCFA agreement must be construed as a whole and against the factual matrix in which it was made: see The Interpretation of Contracts (ed: Lewison).
26. The argument on behalf of the Claimant is that the meaning of clause 5.8, construed in its context and against the background of other contractual documents, is that the solicitors will call upon the union rather than the member to pay their costs, unless the union withdraws support by annulling legal assistance. It is said that the clause does not exclude the member from any liability in costs but rather provides that the solicitors will look first to the union for the payment of their costs. It is submitted that it cannot have been in either the interests of Thompsons or the AEEU to incorporate into the CCFA a term which would, if the Defendant's interpretation is correct, enable opponents of union members to litigate free of any risk of having to pay costs.
27. As to the indemnity principle, Mr Morgan accepts that it applies in the present case but submits that the common law has over many years adopted what he described as "a relaxed approach" and held that the principle is satisfied even where the liability is "little more than notional": see Thornley v Lang (op cit) at paragraphs 5 to 9. He relied in addition in this connection on Adams v London Improved Motor Coach Builders (op cit); Lewis v Averay (No. 2) [1973] 1 WLR 510 and Hollins v Russell [2003] 1 WLR 2487.

Decision on the second issue

28. I accept that if clause 5.8 is properly to be interpreted as meaning that under no circumstances was the Claimant to be liable for costs, to permit the Claimant to recover costs from the Defendant in this action would breach the indemnity principle. It follows that, if Mr McLaren's interpretation is correct, there can be no liability upon the Defendant to pay costs. So much is clear from Adams v London Improved Motor Coach Builders Limited per Bankes LJ at 501 and R v Miller & Glennie, in which case Lloyd J said that the indemnity principle applied unless the facts "…establish a clear agreement express or implied that in no circumstances will the solicitors seek to obtain payment from their client, then the basic presumption stands".
29. The question which I have to decide is therefore whether clause 5.8, properly construed in its context, has the meaning for which Mr McLaren contends. I consider that Mr Morgan is correct in his submission that the courts have over many years adopted "an attenuated approach" as he put it, to the indemnity principle. I take three of the authorities cited by him in support of that proposition by way of example. In Lewis v Averay Lord Denning MR said at 513:

"It is clear that Mr Averay was in law the party to the appeal. He was the person responsible for the costs. If the appeal had failed he would be the person ordered to pay the costs. If the costs had not been paid, execution would have been levied against him and not against the Automobile Association. The truth is that the costs were incurred by Mr Averay but the Automobile Association indemnify him against the costs. This is borne out by a letter of 11 April 1972 from Messrs Amery- Parkes & Co, the AA's solicitors, to the Area Secretary of the Law Society. They say:

'…We… made it clear that Mr Averay was indemnified in all respects by the Automobile Association so that no part of the costs of the appeal has or would have fallen on him' ". The Court of Appeal felt able to conclude that the indemnity principle was not breached notwithstanding the letter from the solicitors indicating that no part of the costs of the appeal had or would have fallen on the Claimant.

30. In Thornley v Lang (op cit) Lord Phillips observed at paragraph 9:

"In Lewis v Averay… the successful Defendant had enjoyed the benefit of legal services funded by the Automobile Association, of which he was a member. Lord Denning MR, with whom the other members of the Court agreed, considered it just and equitable that the Defendant should recover his costs from the Legal Aid Fund in order to be in a position to reimburse the Automobile Association. It is not satisfactory that the right to recover costs in such circumstances should turn on the question whether the litigant has a legal liability to pay such costs, albeit that such liability is little more than notional".

As in Lewis v Averay, the court in Thornley v Lang found itself able to spell out the existence of a binding obligation on the Claimant to pay his solicitors.

31. In Hollins v Russell (op cit), one of the questions which the Court of Appeal had to decide was whether and, if so, in what circumstances breaches of the regulations relating to CFAs should be treated as sufficient to render a CFA unenforceable with the consequence that the receiving party would be deprived of the total amount of his bill of costs because of the indemnity principle. At paragraph 224 it was said:

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

This appears to me to be another example of the courts seeking, if they properly can, to avoid a construction of an agreement which will involve a breach of the indemnity principle because of the unfairness consequent upon such a conclusion.

32. It appears to me that the modern approach to the interpretation of contractual documents facilitates the flexible approach to construction exemplified in the three cases to which I have referred. Of course, an initial judgment of what an instrument was or should reasonably have been intended to achieve should not be permitted to override the clear language of the instrument, as Sir Thomas Bingham MR said in Arbuthnott v Fagan [1995] CLC. However, as Lord Hoffman said in Investors Compensation Scheme v West Bromwich Building Society at 912-3, background facts are relevant as an aid to construction:

"The background was famously described by Lord Wilberforce as the 'matrix of fact', but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man".

33. I think there is force in the submission made by Mr Morgan that there are numerous provisions to be found within the CCFA which support the proposition that the Union is indemnifying the member against legal costs and that disbursements are made by the Union (or in practice by its solicitors) on behalf of the member. Thus clause 1.1.8 defines "legal assistance" to mean "the indemnity against legal costs in respect of advocacy and litigation services granted by the Union to a member". Clause 1.2.3 defines "disbursements" to mean expenses which the solicitors incur "on the member's behalf in the course of an action". Clause 6.1 also refers to the Union paying the solicitors' charges "on behalf of the member". Clause 8.1 of the CCFA addresses the position where the member loses an action, providing that in that event "neither the Union nor the member is liable to pay any of the solicitors' charges for work done on that action". The words "nor the member" are otiose if the position is that the member is under no liability for costs. There are many other references in that clause and elsewhere in the CCFA to payment being made "on behalf of the member". Both the initial retainer letter of 17 May 2001 and the variation of that retainer in the letter of 8 July 2002 use the word "indemnify". Moreover, the CCFA incorporates by reference the "conditions of AEEU Legal Aid" which by clause 6.1 states in terms:

"You are responsible for all the legal costs incurred in connection with your claim. While you are covered by the AEEU's legal aid the AEEU will pay those legal costs on your behalf provided that legal aid is not annulled and that you comply with your obligation to pay to the AEEU any costs recovered from any other party to the proceedings".

I accept that the Claimant did not see those Conditions but their terms nonetheless appear to me to be relevant as a matter of construction.

34. I agree with the conclusion of the Costs Judge at paragraph 54 of his judgment.
35. In my view clause 5.8 of the CCFA is to be interpreted as meaning that in the first instance the solicitors will call upon the Union rather than the member to pay their costs. I do not construe clause 5.8 as excluding altogether the liability of the member to pay the solicitors' costs. The inclusion of the word "directly" presupposes some other, indirect route by which the member may be liable to pay costs, for example if the Union were to withdraw support by annulling legal assistance. I accept that the parties cannot have intended by clause 5.8 that a Defendant would be able to litigate a claim by a Union member without any risk of having to pay that member's costs. Mr McLaren concedes that this would be a consequence that the draftsman did not intend.
36. It follows that I reject the contention that clause 5.8 meant or was intended to mean that the Claimant would in no circumstances be liable to pay the costs of the Defendant. Accordingly the order for costs in favour of the Claimant in the present case did not offend the indemnity principle.

Conclusion

37. It follows that the appeal against the decision of the Costs Judge must be dismissed.