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

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION

		Strand London WC2A 2LL
		5th February 2010

MR JUSTICE MACDUFF:

1. This is an appeal from a decision of Deputy Master Hoffman sitting in the Supreme Court Costs Office, and from an order which he made in two cases on 10^th June last year. He found against the Claimant on a preliminary issue, and gave permission to appeal. I should mention at the head of this judgment that I have been greatly assisted by two Assessors, Master Campbell and Mr Seymour with whom I am sitting. I am assisted by the support and advice that they have given me, but the decision and judgment in this matter are of course my own.
2. I should also mention this, lest I forget later, that a Respondent's Notice was served in this case, effectively cross-appealing (as I shall presently describe) one matter decided by the Deputy Master. During the argument, I granted permission to appeal. It was an application which was not opposed; permission to the Defendants to allow them to cross-appeal.
3. The case before the Deputy Master and before this Court today centres upon the enforceability of two identical, I think identical or very nearly so, conditional fee agreements (CFAs). The Deputy Master was dealing with two cases: the case of Morris and the case of Sibthorpe both of which involved identical points of principle; the same solicitors, Messrs Belshaw & Curtin, and the same counsel, Mr James, acted for the Claimants and now the Appellants, both below and in this court. The Defendant, the London Borough of Southwark are the same with the same representation in both cases.
4. The background is this. The cases were straightforward (if I can use that adjective) housing disrepair claims. Mr Morris' claim centred upon allegations of rodent infestation, and Mr Sibthorpe's upon the ingress of water into his accommodation. Both cases were issued; both cases moved forward to settlement; both cases were settled by the device of a Tomlin order, Mr Morris receiving £10,000 in damages, together with an agreement that the defects in his home would be remedied, and an order for costs against the Defendant. Mr Sibthorpe received £1,300 or so damages, less outstanding amounts of rent, also an order for costs. In his case, by the time the settlement was achieved, the remedial works had been done.
5. So the solicitors had acted for both of them to that successful conclusion, and had obtained an order for costs. Both cases, as I have indicated, had been funded by CFAs, which to all intents and purposes were identical.
6. The terms of the CFA included at several places these words,

'In those circumstances, if you had been able to obtain an insurance policy, that policy will likely pay any costs order made against you. If not, we will indemnify you against any adverse costs order, if you do not beat the opponent's offer'.

7. That was in the context of a Part 36 offer. It was also made in very similar terms in the context of an interim hearing, and in the context of winning and losing. There were other relevant clauses, including the agreement by the solicitors to limit their costs to those agreed with the other side or ordered at an assessment hearing.
8. In summary, under that agreement the Claimants had the benefit of expert solicitor representation. If they won, their damages would be ring-fenced; the solicitors' costs and success fees would be recovered from the Defendants, and the solicitors would limit their costs to what could be recovered. If they lost, which included of course losing at some interim hearing or failing to beat a Part 36 offer, the Claimants were fully protected against any expenditure of costs by them.
9. I note that in the normal CFA (if there is such a being) costs are protected normally by insurance policies, frequently after-the-event (ATE) insurance policies. But here the protection was to be provided to the clients by the solicitor, and it is of course that indemnity which is at the heart of this appeal. Had ATE insurance been provided, the matter would not have been considered by the Deputy Master, and would not be before us today.
10. Having settled the case as I have described, the matter went for detailed assessment before the Deputy Costs Master. The Defendants took three preliminary points which had to be decided by the judge. The first point related to a pre-CFA agreement; I need say no more about that; the Master's decision about that is not appealed, and it need not fall for consideration. The second preliminary point was this: whether that indemnity against liability to pay the opponent's costs was effectively tainted by champerty or maintenance, and if so, whether that made the whole CFA unenforceable. The Master determined that issue against the Claimant, as a result of which the costs order that had previously been negotiated became valueless, and the Claimant's solicitors were unable to obtain any costs from the Defendant.
11. The third preliminary issue was whether the indemnity against liability to pay the opponent's costs was insurance, provided as an activity by way of business within the Financial Services and Markets Act 2000. If so, it is conceded that that would render the CFA unenforceable. The Deputy Master noted that that part of his judgment was now unnecessary (in view of his other decisions) and dealt with that matter very briefly. But insofar as he did deal with it, he decided that issue in favour of the Claimant. It is against that decision that a counter-appeal is launched, Mr Bacon submitting on behalf of the Defendant that he should have succeeded on that point as well.
12. The importance of this case is patent: there are, as I know, other similar cases in the pipeline involving the same parties. Messrs Belshaw & Curtin wish to be paid for the pursuit of their clients' claims against the Borough. Perhaps I can make one or two preliminary observations: the CFA provided for what is, on any view, a modest success fee, one of 10%. It could be so modest for a host of reasons, not least that the evidence below and before me establishes that the solicitors had a firm handle on these cases, assessed them carefully and only pursued those cases which were meritorious. That had the additional advantage, from their point of view, that any indemnity which they gave, (assuming it to be lawful and valid) would have to be used rarely, if at all; and the absence of any ATE insurance was, at least at first glance, of potential benefit to the Defendants because as and when these cases are settled, as they usually are, the Defendants would be faced with a costs bill, damages and a modest uplift, but would not be required, as they would normally, to pay the ATE insurance premium.
13. I should also say something about the background to the way these cases came into being. I have been able to read the witness statement from Mr Curtin which was before the judge in the court below and summarised in the skeleton argument produced on behalf of the Claimant. It is of some significance to understand how it is that this particular form of CFA came into being, and was used not only in respect of these two claims, but in respect of other Claimants as well. For reasons which I am satisfied were entirely good ones, Messrs Belshaw & Curtin had not had their legal aid franchise renewed. That was their own choice. That choice was informed by the nature of the new contracts which were being offered, also the additional bureaucracy consequent upon those contracts. There were also other factors which caused not only this firm of solicitors but many others to move away from legal aid work, and into work provided under CFAs.
14. The clients whom they were seeking to serve were clearly in no position to fund their own litigation. Mr Curtin described this arrangement as a "scheme" and in his witness statement set out the purposes of the scheme and its advantages. I will be forgiven, I hope, if I read to some extent from the Claimant's skeleton argument, which encapsulates the matter admirably,

'In order to continue offering a valuable and much-needed service to the local community, Mr Curtin attempted to design a system which would permit the firm to act for meritorious cases, avoiding the disadvantages of the legal aid scheme, without taking from the clients the benefits of the legal aid scheme such as costs protection and the absence of liability to pay costs to the firm acting; and the core elements of the scheme were a CFA agreement, in fact a CFA-lite agreement, with a low success fee, supported by the indemnity. The system avoided the disadvantages of the legal aid scheme, means-testing, contributions, statutory charge, bureaucracy and so on, but was intended to replicate, at modest cost, to anybody including the Defendant, the benefits of legal aid, as it had once been supplied.'

15. The problem that Mr Curtin had, as he set out to prepare this arrangement, was that ATE insurance was virtually unavailable and certainly unavailable at proportionate cost. An investigation revealed that brokers would require a premium of £3,000, to support a claim which in the case of Mr Morris settled at £10,000 and in the case of Mr Sibthorpe £1,300, with costs including success fee, VAT and disbursements, of £13,000 and £8,000 respectively. Moreover, the financial risk to the firm of paying out on the indemnity was modest, because of the careful attention that was provided for these cases, before the starting-line was crossed.
16. Mr Curtin also suggested that, in devising this arrangement (scheme) the interests of the Defendants were also taken into consideration. The Defendants would be faced with a modest 10% uplift, but of course, unlike legal aid, if they won or made an adequate Part 36 offer, they would be able to claim their costs. Those costs would be the taxable (or I should say assessable) costs, on a commercial basis. They would be paid by the solicitor; and perhaps if I can note en passant one of the ironies of this case is that if, as the Defendant suggests should have happened, an ATE insurance policy had been put in place, the Defendants would have been faced with a substantially higher costs bill, when they went before the Deputy Master than in fact they did face.
17. I propose to deal first with the Appellant's appeal, that is to say the second preliminary matter dealt with by the Deputy Master, before later in this judgment looking at the insurance point, that it is say the third matter. The argument on the appeal itself centres around considerations of maintenance, champerty and public policy. I apologise to Mr James if, in summarising his three arguments which he advanced at some length earlier today, I do not do him justice.
18. He put the case in three different ways. First, he suggested that this CFA was not rendered champertous or tainted by maintenance at all. If so, that would be the end of the matter. The court would not have to go on and consider public policy, or indeed anything else. He submitted that champerty required that the solicitor or the intermeddler would have a 'hand in the till' to extract some of the spoils, and that champerty was more than mere maintenance; it was maintenance with an added dimension that there would be a division of spoils. That did not apply here, so there was no champerty. Moreover, by referring to authority, he went on to submit that maintenance was now (certainly in the modern age) an animal which was only known to the law in respect of third-party intermeddlers, and did not apply to solicitors at all.
19. On behalf of the Defendant, Mr Bacon submitted that the financial interest which the solicitors had in the outcome (the avoidance of paying out on the indemnity) was sufficient to amount to champerty, and did do so. In clause 37 of the skeleton argument written by other counsel but which he adopted, he had said this,

'Ultimately, however, as all parties recognise, the laws of champerty and maintenance are aspects of public policy limiting the ability of third parties to become involved in assisting or encouraging another party's dispute (maintenance) particularly where the third party has a financial stake in the outcome of the litigation (champerty), and generally where legal representatives are concerned, where it might bring the solicitor into conflict with their broad duties to the client and the court'.

20. Mr James submitted that that was an extension, and an unwarranted extension of the definition of champerty. Here was the point: this was not champertous, it was not maintenance, Mr James submitted.
21. If I were to agree with those submissions, it would mean that any indemnity, in any context, however substantial in any case, given by a solicitor to his client, could not be said to be tainted by either maintenance or champerty. But in my judgment, there is a public interest in the administration of justice which goes beyond that, and this issue must be looked at in the light of public policy. Champerty, maintenance and public policy walk together, and it is unhelpful in my judgment to look at them in isolation. The question, it seems to me, which the Court should ask is this: whether public policy demands that this CFA, looked at in the round, should be struck down because of the interest which the solicitor has in the litigation. Whether the agreement, looking at this case today on its own facts, creates a conflict of interest in the solicitor, and whether if it does create such a conflict of interest, that conflict is so stark, or so obvious as to threaten and undermine what has been called 'the purity of justice'; whether it gives rise to the risks which were identified by Lord Phillips, and to which I will return later, in the case of Factortame & Ors, R (on the application of) v Secretary of State for Transport [2002] EWCA Civ 93.
22. Mr James' second submission was as follows: that the CFA is regulated by statute, and that this CFA, or more accurately these CFAs, complied with each and every statutory requirement. Accordingly, it was enforceable and the fact that it contained an additional clause (that is to say the indemnity not normally located within a CFA of this sort) was by-the-by; it was immaterial. I pause again to make the same reflection; if I agree with that submission, it would mean that any indemnity, in any circumstances given by a solicitor to his client's opponents in respect of costs, could not be considered tainted and could not prevent the enforcement of the CFA. Again, in my judgment the public interest requires this Court to determine whether what was agreed has given rise to a conflict of interest, which prevents the solicitor from acting properly in the interests of justice, in the way described by Lord Phillips to which, as I have already promised, I will refer in a few moments' time.
23. But I can also observe, again en passant, in response to arguments advanced by Mr Bacon, that the CFA regulations are permissive, and not prohibitive. Again, I apologise to Mr Bacon for I am surely not doing justice to the depth and excellence of his submissions; but in my judgment the CFA regulations are permissive in the sense that they permit agreements and arrangements which would otherwise be unlawful and not permitted by the common-law. But it does not follow, as night follows day, that the addition of an extra provision, in this case the indemnity clause, must bring down the rest of it merely because there is no permission for that particular clause within the statutory scheme, unless, of course, that additional clause affects some principle which would offend the public policy position, or some other rule of law.
24. And so by that route I arrive at the important (and third) part of the submission advanced by Mr James. It involved considering how the judge in the court below approached what he has called the 'balance of public policy'.
25. I propose to start this segment of my judgment by referring to the old case of Wallersteiner v Moir (No 2) [1975] QB 373, in which at page 402 Lord Denning, then Master of the Rolls, said this,

'It may be worthwhile to indicate briefly the nature of the public policy question. It can, I think, be summarised in two statements; first in litigation a professional lawyer's role is to advise his client with a clear eye and an unbiased judgment; secondly, a solicitor retained to conduct litigation is not merely the agent and adviser to his client, but also an officer of the court, with a duty to the court to ensure that his client's case which he must of course present and conduct with the utmost of care of his client's interests, is also presented and conducted with scrupulous fairness and integrity. A barrister has similar obligations. A legal adviser who acquires a personal financial interest in the outcome of the litigation may obviously find himself in a situation in which that interest conflicts with those obligations.'

26. Note the words, 'personal financial interest' and note the word 'may'. Note also the date: 1975. One may ask oneself the question: how would Lord Denning see that in today's landscape? What would he make of CFAs which would undoubtedly be prohibited by the common law, as summarised by Lord Denning in 1975? Similar sentiments were expressed in Trendtex Trading Corporation Ltd v Central Bank of Nigeria [1977] QB 529 by Lord Justice Oliver.
27. Those statements of the law have been overtaken by events. Clearly, as all judges, lawyers, and other interested commentators have been able to see, the CFA itself potentially places strains and stresses upon the work of the legal adviser, creating obvious potential conflicts which Lord Denning would not have recognised. They are not created by common law. They are allowed only because they are permitted by statute, regulated by detailed rules in Statutory Instruments.
28. The landscape has shifted since 1975. This was recognised by Lord Phillips in Factortame. This is the case to which I promised to return. The relevant part of the judgment is set out in the judgment of Deputy Master Hoffman,

'Where the law expressly restricts the circumstances in which agreements in support of litigation are lawful, this provides a powerful indication of the limits of public policy in analogous situations.'

29. It seems to me that in that statement, Lord Phillips was envisaging the very type of argument to which we have been listening in this case; that that which was previously forbidden by public policy might now, by analogy, be considered to be permissible because of the 'powerful indication of the limits of public policy in analogous situations'. Lord Phillips went on to say, helpfully, this,

' … we believe one must today look at the facts of the particular case, and consider whether those facts suggest that the agreement in question might tempt the allegedly champertous maintainer for his personal gain, to inflame the damages, to suppress evidence, to suborn witnesses or otherwise to undermine the ends of justice'.

30. That, it seems to me, is a question which the Court should ask in cases such as this, and each case will depend upon its own facts. I wish to emphasise this, and to emphasise it within my judgment, in bold letters. This appeal is being decided today on its own facts. It is not intended that it should create any precedent. Each case is to be decided on its own facts. Whether the same result would be obtained in some similar case would depend upon an examination of that case and its own facts. Factors may include the nature of the case, the potential size of the indemnity, the nature of the indemnity; the circumstances of the indemnity; the purpose of the indemnity, and so on.
31. In reaching his decision, the learned Deputy Master referred to the words of Lord Denning and to the words of Lord Phillips. He then went on to consider a case decided in 2008 by another deputy; Deputy Costs Master Williams, and he quoted from her judgment. That was the case of Dix v Townend & Frizzell Financial Services [2008] EWHC 9011. However, that was a very different case in type and size. It certainly involved an indemnity clause, but an indemnity which was to be given against (potentially) a very large sum. Perhaps I can be forgiven for quoting also from that judgment,

'It is not said in this case [that is the case of Dix] that there was any actual interference with justice… I very much regret that I am of the view that, having considered the matters above, this agreement would to an unacceptable degree tend to create the sorts of temptations with which the public policy is concerned, and accordingly I must declare it unenforceable. Although this agreement has some features which are in the interests of justice, the nature of this particular indemnity clause being a broad, uncapped, potentially large liability apparently unsupported by a fund or insurance policy, triggered upon the loss of the case whatever the cause, places the solicitor in the position of having too much at stake.'

32. I pause to consider that. Emphasis may be placed upon "this particular indemnity" which created a "potentially large liability" so that the solicitor would have "too much at stake". What if the indemnity was more modest? What if it formed part of a scheme where one could be confident that other cases would support the potential loss? What if, looking at the overall facts, one could conclude that the solicitor's exposure was relatively small and remote and that there was only a little (as opposed to "too much") at stake?
33. One of the matters to be considered by the Court in a case of this sort (each case on its own facts) is whether a solicitor has so much at stake that a conflict of interest could arise which would prevent him from carrying out his professional duty properly. The Deputy Costs Judge (in Dix) went on to say this:

'It would be unrealistic to expect a solicitor to keep a clear eye and an unbiased judgment, and to maintain that proper distance from the client and the litigation which it his duty to maintain, when the pressure mounts and ethical decisions are needed the consequences of which for the solicitor may be substantial personal liability under this clause.'

34. I have been provided with the background facts to that case. I need not set them out here. It is sufficient to note that the risk of conflict in that case was very different from the risk in this case. In my judgment the statement above (that it would be unrealistic for the solicitor to keep an unbiased judgment when the pressure mounts and ethical decisions are needed and so on) goes far beyond anything one might say about Mr Curtin's position.
35. At the risk of repetition: Each case depends upon its own facts. I express no opinion upon whether Dix was correctly decided. I do venture the opinion that the strains and stresses in that case were significantly greater than in this one.
36. In my judgment, this CFA agreement must be considered in the round. The question to be asked is this. Do its provisions offend against public policy? Does the obligation created by the indemnity clause to pay the other side's costs in the event of failure, place upon the Claimant's solicitor an unacceptable burden which realistically might cause him or her to override the interests of the client, and to put forward his own somewhat different interests? That was the question considered by the Deputy Master in Dix; it was the question considered by the Deputy Master here; and it is the question which I have to consider, with the assistance of my Assessors.
37. I am helped also, in approaching this, by words of Lord Justice Buckley, also in the same case of Wallersteiner in 1975.

'The professional lawyer's role is to advise his client with a clear eye and an unbiased judgment, and a solicitor owes a duty to the court to ensure that his client's case is presented and conducted with scrupulous fairness and integrity, a personal financial interest in the outcome might bring the lawyer into conflict with this principle.'

38. Of course that also was in the landscape of 1975. I ask myself these questions (the questions posed by Lord Phillips to which I have already referred). Is there a real and significant risk (those are my words) that this agreement containing as it does this indemnity clause, might tempt the Claimant's solicitor for his personal gain to inflame the damages? The answer to that is 'No'. To suppress evidence, the answer to that is 'No'. To suborn witnesses, the answer to that is 'No'. Or otherwise to undermine the ends of justice, in my judgment the answer to that also is 'No'. But in reaching that conclusion, I have to confirm that I have taken into account the policy arguments advanced by both Mr James and Mr Bacon before this Court.
39. Mr James submitted, I refer to paragraph 48 of his skeleton argument, that the Deputy Master failed to weigh up the policy arguments applying to this case; there were good policy reasons for the Master to hold that this scheme, as it has been called, was a servant of justice. The policy arguments had to be balanced in each side of the scales. This scheme – Mr James submitted – provided access to justice to vulnerable clients who could not otherwise have had their cases brought. It provided a good service from a highly competent solicitor at modest cost. The CFA had a success fee of a mere 10% - small indeed in the current climate of expensive litigation. It protected the Defendant as well as the Claimant. It avoided the disadvantages of the legal aid system and enabled the Defendant to have the comfort of being able to enforce an order for costs. It should only be if the indemnity placed such a strain on the solicitor that these advantages were overtaken, that the agreement should fall.
40. In my judgment, this particular scheme was in respect of cases with a low risk, low quantum, low volume, low success fee, and an enhancement of access to justice. There were many advantages, and the disadvantage, the one disadvantage namely the potential conflict of having this modest financial stake in the litigation, was as it seems to me, so small as to be clearly outweighed by the advantages and potential value of this scheme. In my judgment, in reaching the conclusion which he did, the Deputy Costs Master erred and following the reasoning in Dix reached the conclusion, as Mr James has submitted "somewhat laconically" that he would adopt the same approach. But, I interpolate, in very different circumstances. In the course of argument, I put to counsel that where an agreement of this sort was reached, there was a line somewhere, and the Court had to determine whether the case, on its facts, fell below the line or above the line. The Deputy Costs Master held that this case was on the wrong side of the line. I appreciate, of course, that an Appellate Court should not lightly interfere with the judgment of the lower court upon a matter such as this. Only if the Deputy Master erred may the Court interfere. But in my judgment, the benefits of this scheme measured against the small financial interest which the solicitor had in an individual case put this very clearly and very obviously on the correct side of the line. This is a decision which should be set aside and this appeal will be allowed.
41. By way of cross-appeal, the Defendant argues that this agreement was "insurance provided as an activity by way of business" within the Financial Services and Markets Act. The Deputy Costs Master said this, 'In view of my decision on preliminary issue two, it is unnecessary to give an exhaustive judgment on this point' and he did not do so.
42. The Claimants submit that I should follow the analysis of Deputy Master Williams in Dix, where she held that there was a contract of indemnity, not insurance; alternatively the solicitor does not carry on an insurance activity by way of business. The grant of the indemnity was incidental to the business of supplying legal services. But the Claimants also pray in aid the Court of Appeal's definition of insurance, in Callery v Gray [2001] EWCA Civ 124; 'Insurance is the purchase of an indemnity against the risk of loss caused by a fortuity'.
43. The Defendant submits that the Financial Services Authority adopts a much wider test, and that there is no necessity for a purchase to take place, but for there to be an identifiable and distinct obligation, described as an insurance obligation. In my judgment, the legal test to be applied is as set out above, in Callery v Gray, and I find that the CFA is not an unlawful contract of insurance.
44. The Master below dealt with this non-exhaustively, as he said. At that stage, the outcome of the case did not depend upon this decision. Now that I have allowed the appeal on the earlier part, it does become a more important consideration, and deserves more detailed examination. However, having listened to Mr Bacon very carefully, and read the authorities and the skeleton, and the arguments which he advanced and with the assistance of my Assessors I have reached the conclusion that this argument really does not bear detailed examination. There is no statutory definition of insurance, and it is clear that the courts have repeatedly held and affirmed that a contract of insurance does not have to have a premium. On the other hand, as Mr James has pointed out, the payment of premium or the non-payment of premium might provide a valuable pointer.
45. I have been referred to the following extract from McGillivray on Insurance Law. I do not apologise for quoting it, word-for-word, reflecting as it does my own view,

'It is sometimes necessary to decide, in the context of fiscal or regulatory legislation, whether a contract containing insurance and non-insurance elements should be classified wholly or partly as a contract of insurance. The inclusion of indemnity provisions within a contract, or the supply of services, neither makes the indemnifier an insurer, nor justifies describing the contract as wholly or partly one of insurance. Where a contract for sale, or for services, contains elements of insurance, it will be regarded as a contract of insurance only if, taking the contract as whole, it can be said to have as its principal object the provision of insurance.'

46. In my judgment, this, on any view, was a contract for the provision of legal services. The indemnity clause, whether looked at individually or as part of the contract, was a subsidiary part of the contract. In his oral submissions, Mr Bacon adopted what might be called 'the bystander test'. Anybody, he submitted, looking at this agreement, would say, 'Well, this is really providing insurance'. With respect, I would beg to differ; the bystander looking at this agreement, would say to himself or herself that this was a contract for the provision of legal services, with an indemnity clause whereby the solicitor undertook to pay the opponent's costs, in the event that that became necessary. To characterise it as a contract of insurance, albeit that the indemnity created some principles similar to an insurance contract, is to go too far. I appreciate that that does not do full justice to Mr Bacon's long and careful argument. But in my judgment this could not be characterised as a contract of insurance, and albeit delivered with brevity, the Deputy Master's Judgment was entirely accurate and cannot be faulted. Accordingly, this appeal must be allowed, and I suppose Mr James the order is that it should be remitted back to a Costs Master for a detailed assessment.

End of Judgment.

Costs discussion transcribed separately.

Approved as amended and perfected above

Alistair MacDuff

12.02.10