CFA litigation update

There have been a number of challenges to the validity of conditional fee agreements (CFAs) on a range of grounds.

These challenges have been brought by paying parties who seek to avoid paying costs by establishing that their opponent's CFA breaches the Conditional Fee Agreement Regulations 2000 (CFAR).

If this is the case, the paying party has no liability for costs under the continuing operation of the indemnity principle.

The Court of Appeal considered a number of alleged breaches at the hearing of six cases in March and its judgment is now available (Hollins v Russell [2003] EWCA Civ 718) (see [2003] Gazette, 30 May, 3).

It gives guidance on the points below and held that a purely technical breach does not render a CFA unenforceable.

A brief summary of the Court of Appeal judgment is provided here with a diagram showing how a test can be applied to ascertain whether a CFA is enforceable following a challenge by the paying party.

The Law Society will now give consideration to reviewing the current model agreement to incorporate comments from various judgments and other changes which have occurred since publication of the last model agreement.

The judgment

The indemnity principle.

This applies and paying parties will not have to pay costs where the client has no liability for costs owing to an unenforceable CFA.

Pratt v Bull and Worth v McKenna.

CFAs should be disclosed at assessment or the paying party put to election to prove entitlement to costs by another means.

But confidential information may be deleted from the agreement prior to disclosure.

There was no finding made as to whether a CFA is privileged as no argument was heard.

A certificate of accuracy on the bill, signed by the solicitor, should be sufficient to render disclosure of file notes relating to the making of the CFA unnecessary in the absence of an allegation of a material breach.

A CFA will satisfy the conditions in section 58 of the Courts and Legal Services Act 1990 and is, therefore, not unenforceable if there has been substantial compliance with or no material departure from what is required.

The test to be applied if there is an apparent breach is whether it has had a materially adverse effect on the client or the proper administration of justice.

The requirements should be considered in the light of their purposes.

(see flow chart).

Disbursements (including that for the after-the-event insurance premium) actually paid whether from client's own pocket or by means of disbursement loan, for which the client is responsible, are recoverable even where the CFA is unenforceable.

Hollins v Russell.

The Law Society interim model, when read as a whole, complies with requirements of the regulations and thus is enforceable.

A CFA is not unenforceable if there is a failure to specify the percentage of success fee attributed to deferment of charges (regulation 3(1)(b) CFAR 2000).

Dunn v Ward.

It is not necessary for the agreement to state that the solicitor has no interest in the insurance policy to meet the requirements of the regulations.

The written explanation of the effect of the agreement may be provided by the agreement itself although this is dependant on the facts of the case.

In this case, the Law Society model agreement with Plain English Award was used.

But a separate letter would be preferable.

Pratt v Bull.

The receiving party does not have to disclose attendance notes relating to inquiries relating to pre-existing insurance.

The CFA is not unenforceable if it is made before such inquiries are completed in the circumstances of this case.

The issue of pre-existing insurance is germane to the reasonableness of the insurance premium rather than the enforceability of the CFA.

TAG test cases.

Solicitors may delegate duties to give information about CFAs to unadmitted staff, including agents, so long as they exercise supervision.

Such arrangements fulfil the requirements of regulation 4 of the 2000 regulations and thus satisfy the conditions for the purposes of section 58 of the Courts and Legal Services Act.

There are no prescriptive arrangements as to nature of supervision.

The fact that a TAG representative provides the explanation does not inevitably make the CFA unenforceable.

Simple CFA - 'CFA lite'

The regulations for this came into effect on 2 June and solicitors need to read these carefully if considering using these arrangements.

'CFA lite' is a CFA that allows solicitors and their clients to contract on the basis that the client will not be liable for the costs as the solicitor will accept those payable by the other party.

An amendment to the Civil Procedure Rules 1998 also takes effect on this date to ensure that these agreements are not caught by the indemnity principle.

In essence, these regulations legitimise what are commonly known as 'speccing' or Thai Trading arrangements.

The only exception to this should be where damages are paid, but costs (which are ordered or deemed to be ordered) are irrecoverable for some reason.

In this case, the client must have been advised if they are to be liable for costs if the order/agreement is unenforceable.

If money is taken from damages in these exceptional circumstances, the Law Society recommends that no more than 25% of any damages should be deducted on account of costs in line with earlier guidance on unrecoverable elements of conditional fees.

The Law Society holds the view that global settlements (that is, settlements that fail to distinguish between damages and costs) are incompatible with 'CFA lite' and damages and costs should always be separately agreed.