English and Welsh Courts - Miscellaneous

IN THE LEEDS COUNTY COURT

		12 January 2010

1. Introduction

1. This appeal raises a short but by no means straightforward question in the continuing satellite litigation over Conditional Fee Agreements.
2. A Claimant suffers loss as the result of the tortious act of the Defendant. The loss is, however, also covered under the terms of an insurance policy between the Claimant and an Insurer. The Claimant makes a claim upon the policy. The insurer satisfies the claim and exercises its rights of subrogation to compel the Claimant to issue proceedings against the Defendant. The Insurer agrees to indemnify the Claimant in respect of any liability to costs and the Claimant instructs solicitors nominated by the Insurer with whom the Insurer has entered into a Collective Conditional Fee Agreement.
3. The solicitors successfully negotiate a settlement of the claim on terms that include an agreement that the Defendant will pay the Claimant's costs to be subject to an assessment on a standard basis in default of agreement. On the assessment the Claimant seeks a success fee. The Defendant contends that there should be no success fee relying on the fact that the Claimant had the benefit of a full indemnity for his costs from the Insurer. In those circumstances it was unreasonable for the Claimant to enter into a conditional fee agreement at all.
4. The issue of the Claimant's entitlement to a success fee was listed before District Judge Fairwood on 1^st October 2009. D J Fairwood accepted the Defendant's arguments and held that no success fee was payable. In summary he held that the court must look at and reflect the reality of the situation. As the Claimant was never at risk as to costs it was unreasonable for him to rely on and be allowed to rely on a Conditional Fee Agreement. Accordingly he disallowed the success fee but granted the Claimant permission to appeal.
5. This, then, is an appeal against D J Fairwood's ruling. It is apparent that the appeal raises a point of considerable importance. As will appear in more detail below there is nothing special about the facts of this case. The ruling will apply to any case where an insurer exercising rights of subrogation requires the insured to instruct lawyers to seek recovery of the loss from a third party allegedly responsible for the damage.

2. Representation

6. The Claimant, nominally Mr Sousa, was represented by Benjamin Williams instructed by Parabis Law LLP trading as Cogent Law of Josephs Well, Hanover Walk, Leeds LS3 1AB. The Defendant, nominally the London Borough of Waltham Forest was represented by Craig Ralph instructed by Barlow Lyde & Gilbert of Beaufort House, 15 St Botolph Street London EC3A 7NJ
7. Both Counsel produced detailed skeleton arguments and presented their respective cases with conspicuous clarity. I am most grateful to each of them for their assistance.

3. The Facts

8. The Claimant suffered subsidence damage to his property caused by tree roots of a tree owned by the Defendant. He made a claim on a household policy with Virgin Insurance – part of the RBS Group ("the Insurer"). The policy was not in evidence before D J Fairwood.
9. The claim was settled subject to an excess of £1,000 provided for in the policy. After payment the Insurer in exercise of its rights of subrogation required the Claimant to pursue a claim against the Defendant in respect of his loss. In so doing the Insurer required the Claimant to instruct a specific firm of solicitors – Cogent Law – pursuant to a Collective Conditional Fee Agreement which had been negotiated between the solicitors and the Insurer. The Collective Conditional Fee Agreement was not in evidence before D J Fairwood.
10. Before D J Fairwood the application was argued on the assumption that the Claimant was entitled to be indemnified by the Insurer as to any liability he might incur in respect of costs payable either to the Defendant or the solicitors. At one stage during the appeal Mr Williams sought to challenge that assumption. He pointed out that as the Claimant's claim included an element for his uninsured loss he ought to have been potentially liable for a proportionate part of any liability for costs. I refused to entertain the submission. As between the Claimant and the Insurer, the Claimant's potential liability for costs was primarily a matter of contract between them. No correspondence or other documents were in evidence in relation to that contract; it is within my personal experience that it is not uncommon for an insurer bringing a subrogated claim to provide the insured with a complete indemnity even though the claim includes a small element of uninsured losses. The claim was argued before D J Fairwood on the basis that the Claimant was entitled to a complete indemnity. There is, in my view, no reason, to permit the Insurer to resile from that position and to argue that the Claimant was entitled only to a partial indemnity. In the absence of disclosure by the Insurer of all the relevant documents there is in fact no reason to believe that the Claimant was not in fact entitled to a complete indemnity. Indeed in the absence of a complete indemnity it is at least arguable that the Claimant could not be compelled to instruct the solicitors chosen by the Insurer.
11. The claim against the Defendant was settled speedily without the necessity for proceedings. Indeed the Defendant did not, at that stage, instruct lawyers. The Defendant agreed to pay the Claimant £6,250 plus his reasonable costs. By the time the matter came before D J Fairwood the parties had agreed the costs in the sum of £3,750 subject to the question of the success fee.
12. As already noted D J Fairwood held that no success fee was payable and accordingly the Bill was assessed at £3,750. He granted the Claimant permission to appeal.

4. Mr Williams' submissions

13. Mr Williams divided his submissions into a number of areas:

4.1 The decision in Campbell v MGN Ltd (No 2) [2005] 1 WLR 3394

14. In this well-known case Naomi Campbell brought an action against the defendant newspaper publisher seeking damages for breach of confidentiality. The judge gave judgment for the claimant and awarded her damages of £3,500 and costs. The Court of Appeal unanimously reversed the judge's decision and ordered her to pay the costs of the trial and 80% of the costs of the appeal. Ms Campbell entered into a conditional fee agreement with her solicitors and counsel pursuant to section 58 of the Courts and Legal Services Act 1990, and appealed to the House of Lords. The agreement provided that if the appeal succeeded solicitors and counsel should be entitled to success fees of 95% and 100% respectively. The House of Lords allowed the claimant's appeal, restored the judge's order and ordered the defendant to pay the claimant's costs in the Court of Appeal and the House of Lords. The claimant's solicitors served on the defendant bills of costs amounting to £1,086,295 which included success fees of £279,981. It was argued by the Defendant that the success fee should be wholly disallowed on the ground that Ms Campbell could have afforded to fund her own appeal.
15. It was held by the House of Lords that it was not disproportionate for a wealthy claimant to make use of Conditional Fee Agreements in order to fund litigation. There was no obligation on the claimant's solicitors to enquire into the client's means so as to be satisfied he could not fund the litigation himself. Conditional Fee Agreements were open to everyone irrespective of their means.
16. Mr Williams accordingly submitted that if the claim had been vested in the Insurer there could have been no objection to the Insurer entering into a Conditional Fee Agreement with its solicitors. He pointed out that once the Insurer had paid out its insured the Insurer was entitled to require an assignment of the cause of action. If it had elected to take that course there could have been no objection in principle to the Insurer pursuing the assigned cause of action with the benefit of a Conditional Fee Agreement. It was, he submitted, anomalous if the recoverability of a success fee depended on whether the Insurer chose to recover its losses by virtue of its rights of subrogation rather than by assignment.

4.2 The Collective Conditional Fee Agreements Regulations 2000^[1]

17. Under these regulations funders of litigation entered into Conditional Fee Agreements with legal representatives in respect of class or classes of proceedings where fees were payable on a common basis in relation to each class. It is clear that the client did not need to be named in the agreement and the funder did not need to be a client.
18. Mr Williams pointed out that many of the industrial injury actions which are funded by Trade Unions on behalf of their members are prosecuted under Collective Conditional Fee Agreements entered into between the Trade Union and their solicitors. Motoring Organisations such as the RAC have entered into Collective Conditional Fee Agreements with their solicitors. In such cases success fees are regularly claimed and paid.
19. There is, he submits, little or no difference between a Trade Union or the RAC funding a personal injury action for its Member and an Insurer funding its Insured's claim to recover the loss.
20. It is true, of course, that in one case the Member can keep the damages recovered for himself and in the other the Insured holds them on trust for the Insurer. Mr Williams submits that this is a distinction without a difference.

4.3 The nature of subrogation

21. Mr Williams referred me to a number of passages from MacGillivray on Insurance Law on the nature of subrogation^[2]. I shall not lengthen this judgment by setting out those passages at length. He did however refer me to a celebrated passage^[3] in the judgment of Brett LJ in the judgment in Castellain v Preston (1883) 11 QBD 380, 386,

The very foundation, in my opinion, of every rule which has been applied to insurance law is this, namely, that the contract of insurance contained in a marine or fire policy is a contract of indemnity, and of indemnity only, and that this contract means that the assured, in case of a loss against which the policy has been made, shall be fully indemnified, but shall never be more than fully indemnified. That is the fundamental principle of insurance, and if ever a proposition is brought forward which is at variance with it, that is to say, which either will prevent the assured from obtaining a full indemnity, or which will give to the assured more than a full indemnity, that proposition must certainly be wrong.

…

I have mentioned the doctrine of notice of abandonment for the purpose of coming to the doctrine of subrogation. That doctrine does not arise upon any of the terms of the contract of insurance, it is only another proposition which has been adopted for the purpose of carrying out the fundamental rule which I have mentioned, and it is a doctrine in favour of the underwriters or insurers in order to prevent the assured from recovering more than a full indemnity; it has been adopted solely for that reason. It is not, to my mind, a doctrine applied to insurance law on the ground that underwriters are sureties.

…

. Now it seems to me that in order to carry out the fundamental rule of insurance law, this doctrine of subrogation must be carried to the extent which I am now about to endeavour to express, namely, that as between the underwriter and the assured the underwriter is entitled to the advantage of every right of the assured, whether such right consists in contract, fulfilled or unfulfilled, or in remedy for tort capable of being insisted on or already insisted on, or in any other right, whether by way of condition or otherwise, legal or equitable, which can be, or has been exercised or has accrued, and whether such right could or could not be enforced by the insurer in the name of the assured by the exercise or acquiring of which right or condition the loss against which the assured is insured, can be, or has been diminished. That seems to me to put this doctrine of subrogation in the largest possible form, and if in that form, large as it is, it is short of fulfilling that which is the fundamental condition, I must have omitted to state something which ought to have been stated. But it will be observed that I use the words "of every right of the assured." I think that the rule does require that limit.

22. Mr Williams made the point that one of the advantages enjoyed by the insured was the right to pursue a claim for his remedy in tort with the benefit of a Conditional Fee Agreement. If D J Fairwood's ruling is correct the Insurer is being denied that advantage.
23. Mr Williams referred me to an article by Professor Mitchell in Lloyds Maritime and Commercial Law Quarterly ^[4] where he discussed the defences to an insurer's subrogated claim. In the article Professor Mitchell makes the point that a subrogated claim is brought in the name of the Insured and that the Insurer is not a party to the action. It is not a defence to the subrogated claim that the Insured has been paid in full by the Insurer.

4.4 CPR

24. As will appear below central to Mr Ralph's submissions are CPR 44.5 and paragraph 11.8 of the Costs Practice Direction:
25. As is well-known under CPR 44.5 the court is to have regard to all the circumstances in deciding whether costs were proportionately and reasonably incurred. Furthermore in an assessment on the standard basis the court must resolve any doubt it may have as to whether the costs were reasonably incurred in favour of the paying party.
26. Paragraph 11.8 of the Costs Practice Direction provides:

11.8(1) In deciding whether a percentage increase is reasonable relevant factors to be taken into account may include:

(a) the risk that the circumstances in which the costs, fees or expenses would be payable might or might not occur;

(b) the legal representative's liability for any disbursements;

(c) what other methods of financing the costs were available to the receiving party.

27. D J Fairwood has in effect held that it was not reasonable (within CPR 44.5) for the Insured to litigate with the benefit of a Conditional Fee Agreement because he had the benefit of a complete indemnity for his costs from the Insurer. This was a factor he was entitled to take into account under Paragraph 11.8(1)(c) of the Practice Direction.
28. Mr Williams submits that D J Fairwood fell into error in 2 ways. First he submits that D J Fairwood was wrong to take into account the indemnity at all. This was a subrogated claim and the fact that the Insured was being funded by the Insurer was just as irrelevant as the fact that the Insured had been paid by the Insurer. The funding by the Insurer should have been, to use the modern expression chosen by Mr Williams "behind the curtain".
29. If, contrary to the first submission, D J Fairwood was entitled to look behind the curtain he had to look at the whole picture. If he had done that he would have appreciated that the alternative source of funding available to the Claimant was on the basis that he instructed the Insurer's panel solicitors under the terms of the Collective Conditional Fee Agreement.
30. Thus either way it was reasonable for the Claimant to claim a success fee and the appeal ought to be allowed.

5. Mr Ralph's submissions

31. In his skeleton argument Mr Ralph makes a number of points about the lack of documentation before the court. For example in paragraph 4 he makes the point that neither the Court nor the Defendant has been allowed to consider the retainer between the Insurer/the Insured and its panel solicitors or the Contract of Insurance.
32. To my mind these criticisms are unfair. There is no evidence that either of these documents has been requested by the Defendant or that there has been any refusal to supply them. If the Defendant had thought them necessary and if the Claimant and/or the Insurer had refused to supply them it seems highly likely that the Court would have ordered disclosure. The application was not fought before D J Fairwood on the footing that the Claimant had failed to produce relevant documents and it would not be right to deal with the appeal on that footing. This was, after all, a comparatively modest claim and a by no means enormous bill of costs. Both sides seem to have been content to deal with the point on the basis of general principles.
33. Mr Ralph submits that D J Fairwood was not only entitled but bound to take into account alternative funding. He submits that the issue is whether D J Fairwood was wrong. He submits that the Claimant failed because as a matter of evidence he failed to show that it was reasonable to enter into a Conditional Fee Agreement.
34. He draws my attention to a number of authorities in support of the proposition that an insurer can occupy no better position than the insured in pursuing a subrogated claim. As a result the subrogated action will be subject to whatever defences the third party is entitled to raise against the insured.
35. He does not accept that the Court should ignore the existence of subrogation. He draws my attention to the decision in The Seaspeed Dora [1988] 1 Ll 36 where an order for security for costs was refused in a case where some of the Claimants were within the jurisdiction and some without. The Court of Appeal expressly took into account the fact that there was an adequate fund to meet any order for costs within the jurisdiction and there was no likelihood of an apportioned order. In those circumstances no order for security for costs was made. This emerges clearly from Dillon LJ's judgment:

If therefore the case in which security is sought, where there are some English plaintiffs and some foreign plaintiffs, was a case where there was a realistic possibility that the Court at the trial might make an order if the plaintiffs failed, ordering each merely to bear an aliquot share of the costs, an order such as Mr. Justice Webster made ordering security for aliquot shares of the costs would in my view be highly appropriate.

…

There being the jurisdiction to make an order for security as there are co-plaintiffs outside the jurisdiction, and it not being a case in which issues affecting the co-plaintiffs outside the jurisdiction only can be easily identified, or in which there is in my view any likelihood of the Court ordering each individual plaintiff to bear an aliquot share only of costs, is it right that there should be an order somewhat in the way of a blunt instrument for the provision of aliquot shares for security, or is this a case in which security is not really required by the defendants because it is a case in which, if they succeed, they will be bound to get an order for costs against plaintiffs resident within the jurisdiction? There is no suggestion that the plaintiffs within the jurisdiction, with or without the support of their underwriters, would not be able to meet any order for costs that might be made. They include several apparently very substantial companies.

36. In summary Mr Ralph submits that D J Fairwood was correct for the reasons he gave. It was unreasonable for the Claimant to incur the burden of a success fee when he already had the benefit of an indemnity from the Insurer.

6. Discussion and Conclusions

37. As I noted earlier in the judgment the issue between the parties is relatively short and has been extremely well argued both in the skeleton arguments and orally. I have summarised both the arguments and the authorities and do not need to repeat them. I prefer the submissions of Mr Williams. My reasons, which largely echo the submissions of Mr Williams, are as follows:

1. I agree with Mr Williams that it would be somewhat anomalous if an insurer with an assigned cause of action were able to take advantage of a Conditional Fee Agreement whereas an insurer with a subrogated claim cannot. I also agree that there is no difference in principle between a Union funding its members' personal injury action and an insurer pursuing a subrogated claim through its insured. In each case there is an indemnity as to costs. The fact that in one case the Member enjoys the fruits of the action and in the other they are held on trust for the insurer does not, as it seems to me affect the position. This is especially the case where it is accepted that an Insurer is entitled to litigate with the benefit of Conditional Fee Agreements.

2. I also agree with Mr Williams that it is inherent in the concept of subrogation that the Insurer is entitled to the advantage of every right of the Insured. It is for that reason that a Defendant is not allowed to rely on payment by the Insurer as a defence to a subrogated claim against him. Equally, as it seems to me, he should not be allowed to rely on the fact that the Insurer has to fund the claim as a defence to the Insured's claim for a success fee when the claim succeeds. Otherwise the Insurer is in a worse position in recovering the loss that the Insured would have been. This point is also reinforced by the fact that the Insurer is entitled to litigate with the benefit of Conditional Fee Agreements. In my view the decision in The Seaspeed Dora is plainly distinguishable from this situation. First it dealt with the discretion to award security for costs. Second it was a case with a number of Claimants; some were within the jurisdiction and had sufficient funds to meet any order for costs. It was not really a case about the extent of subrogated rights at all.

3. I accept, of course, that under CPR 44.4 it must be reasonable for the Claimant to enter into a Conditional Fee Agreement and to incur the potential liability of a success fee. I also accept that under paragraph 11.8 of the Practice Direction the Court is bound to take into account what other methods of funding the costs are available to the Claimant. It is however not seriously arguable that a Union member is acting unreasonably in taking advantage of the funding provided by the Union under the CFA it is difficult to see why a Claimant pursuing a subrogated claim as instructed by the Insurer is in a different position.

4. It has however to be remembered that the Insurer in a subrogated claim can control the litigation. It can dictate the solicitors to be instructed and can agree terms with those solicitors. In his skeleton argument Mr Ralph suggests that the contract of insurance makes no express provision for a success fee. For reasons I have given I am quite prepared to assume that this is so. It does not affect the position that the Insurer was entitled to control the litigation and to dictate to the Insured the terms of the agreement between him and the solicitors (subject to an indemnity from the Insurer). If those terms included a success fee I cannot see that it was unreasonable for the Claimant to enter into it. In effect he had no choice.

38. In my view therefore D J Fairwood was with respect wrong to disallow the success fee. I would allow this appeal.

JOHN BEHRENS

Note 1   These regulations have been repealed but were in force at the relevant time. The standards required of solicitors entering into Conditional Fee Agreements or Collective Conditional Fee Agreements have since November 2005 been addressed by the rules of professional conduct.    [Back]

Note 2   See paragraphs 22-001 – 22-005 on the general nature of subrogation and 22-011 on the difference between subrogation and assignment.    [Back]

Note 3   Described by Diplock J in times when Latin was permitted as “the locus classicus of the doctrine of subrogation”    [Back]

Note 4   [1996] LMCLQ 343. He was then Dr Mitchell.    [Back]