BENCHMARKS

Wrath of an old principle

Master Colin Campbell offers an update on the latest conditional fee developments

On 21 March 2003, the Court of Appeal reserved judgment in six leapfrogged cases involving conditional fee agreements (CFAs).

Upon its decision may rest the future of many claimant law firms which face ruin if the court finds that their entitlement to costs and a success fee under their CFAs is unenforceable, even though their clients won their claims and recovered damages.

To understand how this troubled situation has arisen, it is necessary to look no further than to the indemnity principle.

This provides that a successful party cannot recover any costs from his opponent if he is under no liability to pay anything to his own solicitor.

That the costs will, in practice, be met by his trade union, employer, legal expenses insurer or rich Aunt Agatha matters not.

Moreover, provided 'it is made clear that the client is liable for full costs irrespective of the outcome of the proceedings, there can be no objection to the solicitor agreeing that such liability need not be discharged until the outcome of those proceedings, if any, is known' (British Waterways v Norman [1993] 26 HLR 243).

What is it in the relationship between a principle established in the Victorian age and a 21st century CFA which is threatening the viability of high street solicitors? Under a CFA, a lawyer can act for a client on terms that he will not charge him, or not charge as much, if an agreed result is not achieved.

'Old' CFAs entered into between 5 July 1995 and 31 March 2000 did not permit the recovery of a success fee or after-the-event (ATE) insurance premium from the loser, and these sums fell to be deducted from the winner's damages.

In October 1997, Lord Irvine announced the government's intention to widen the availability of CFAs 'to make justice accessible to all'.

The legislation to achieve this is found in sections 27-30 of the Access to Justice Act 1999, the CFA Order 2000 and the CFA Regulations 2000.

'New' CFAs entered into after 1 April 2000 must be in writing, contain prescribed information, comply with the regulations and are unenforceable unless they relate to specified proceedings.

Success fees and ATE premiums in such CFAs are recoverable from paying parties.

The Civil Procedure (Amendment No.3) Rules 2000 effect changes to the Civil Procedure Rules 1998 (CPR) and particularly to its costs provisions in order to implement the new conditional fee legislation.

The costs practice direction supplementing CPR 43 to 48 contains further requirements.

The purpose of these measures is to protect gullible clients from unscrupulous lawyers, and no CFA is permissible unless it complies with the relevant primary and secondary legislation (see Awwad v Geraghty [2000] 1 AER 608).

Contingency fees remain outlawed.

Win but no fee

The concept of CFA work is 'no win no fee' but if the CFA has a defect making it unenforceable against the client, it can also mean 'win but no fee'.

It follows that a defendant who can show that the CFA is unenforceable because it does not comply with the Act, CFA order or regulations may be able to escape paying any costs at all via the operation of the indemnity principle.

The appeals involve the 2000 regulations.

In Hollins v Russell at Oldham County Court on 28 November 2002, and Tichband v Herdman at Altrincham County Court on 24 October 2002, Judge Tetlow and Judge Holman respectively held that an infringement of regulation 2(1)(d) rendered the CFA unenforceable against the client, so no costs could be recovered from the defendant under the indemnity principle.

In Dunn v Ward at Macclesfield County Court on 30 October 2002 Judge Barnett went the other way, deciding that a CFA which breached regulation 4(2) (statement by a solicitor as to any interest in the ATE insurance) was nonetheless enforceable.

In the Accident Group test cases [2003] 1 AER 353, Master Hurst declined to follow English v Clipson (a decision of District Judge Wharton) and held that an Accident Group panel solicitor could appoint a group representative as his agent to explain the effect of a CFA to an intending claimant for signature so as to comply with regulation 1(3) and (4).

The recoverability of costs in 211,000 cases turns on that decision and it follows that if the Accident Group cases are reversed, the financial ramifications for the claimants' solicitors involved in them will be catastrophic.

Can defendants compel claimants to hand over a CFA so that it can be scrutinised for defects? Currently the certificate on a receiving party's bill raises a rebuttable presumption of compliance with the indemnity principle and defendants must show a 'genuine reason' for believing that there is not a proper fee arrangement (Hazlett v Sefton BC [2000] 4 AER 887, Bailey v IBC Vehicles) [1998] 3 AER 570).

Satellite litigation to compel production of documents is a blot on the civil justice system (Burnstein v Times Newspapers 28 November 2002 CA) and in Pratt v Bull Taunton County Court, 11 September 2002, Judge Cotterill refused disclosure because: 'they, the paying party were not fulfilling the role of white knights protecting the gullible litigant but were seeking to exploit for their own benefit any inefficiency in the solicitor in his conformity with the CFA regulations.

I have no doubt that it is a profitable exercise, that is the scrutinising of CFA agreements but it does not, in my opinion, justify the assertion that there is an issue to be investigated by the court.'

Pratt is under appeal (so too is Worth v McKenna, Liverpool County Court, 6 November 2002, Judge Marshall Evans QC, which followed Pratt) and the Court of Appeal is to decide whether a receiving party can maintain his claim for costs while preventing the paying party not only from seeing his CFA but also without being put to his election under CPD 40.14, which permits the court on detailed assessment to require production of any document necessary to enable it to reach its decision.

No more fishing?

A ruling in favour of disclosure will curtail fishing expeditions but will compel claimants to hand over their documents so that vigilant defendants can examine them for the slightest non conformity with the regulations.

To address this, the Lord Chancellor's Department has announced proposals for a review of the regulations.

The options include limiting the ability of paying parties to raise regulation compliance issues, making the consequences of non compliance subject to the discretion of the court or to some test of materiality, or simplifying the regulations by removing the client care provisions altogether.

The provisional timetable for implementation is this Autumn, which may be much too late for those affected by the outcome of the leapfrogged cases.

All might be well for claimants if the indemnity principle is abolished so that the recoverability of fees from defendants is not dependent on the winning solicitor's funding arrangements with his own client.

The Lord Chancellor's Department accepts that there is no existing prospect of abolition because this requires primary legislation, so unless the Court of Appeal comes out with something remarkable, a Victorian principle will continue to drive a coach and horses through 21st century regulations to the detriment of claimant solicitors and to the delight of defendant insurers.

Master Colin Campbell is a costs judge sitting at the Supreme Court Costs Office and a member of the Association of District Judges