A costs judge has found fault with the Law Society's model conditional fee agreement, but practitoners should not panic, argues Gary Barker

The Supreme Court Costs Office (SCCO) recently considered another technical challenge to a conditional fee agreement (CFA) in the case of Ghannouchi v Houni Limited (Case No: HQ02X00565).

This time the challenge was to the wording of the Law Society model agreement in respect of recovering additional costs from a client where costs are agreed or assessed (see Gazette [2004] 11 March, I).

The case revolved around the issue of whether the model agreement accurately reflected the wording and intention of the Conditional Fee Agreements Regulations 2000.

Regulation 3, subsection 2, states: 'If the agreement relates to court proceedings, it must provide that where the percentage increase becomes payable as a result of those proceedings, then:

'(a) if - (i) any fees subject to the increase are assessed, and (ii) the legal representative or the client is required by the court to disclose to the court or any other person the reasons for setting the percentage increase at the level stated in the agreement, he may do so,

'(b) if - (i) any such fees are assessed, and (ii) any amount in respect of the percentage increase is disallowed on the assessment on the ground that the level at which the increase was set was unreasonable in view of facts which were or should have been known to the legal representative at the time it was set, that amount ceases to be payable under the agreement, unless the court is satisfied that it should continue to be so payable, and

'(c) if - (i) sub-paragraph (b) does not apply, and (ii) the legal representative agrees with any person liable as a result of the proceedings to pay fees subject to the percentage increase that a lower amount than the amount payable in accordance with the conditional fee agreement is to be paid instead, the amount payable under the conditional fee agreement in respect of those fees shall be reduced accordingly, unless the court is satisfied that the full amount should continue to be payable under it.'

The wording of Law Society condition 4 incorporated in the model agreement is: 'If the court carries out an assessment and disallows any of the success fee percentage because it is unreasonable in view of what we knew or should have known when it was agreed, then that amount ceases to be payable unless the court is satisfied that it should continue to be payable.

'If we agree with your opponent that the success fee is to be paid at a lower percentage than is set out in this agreement, then the success fee percentage will be reduced accordingly unless the court is satisfied that the full amount is payable.'

It was argued that the difference in the wording of subsections (b) (ii) and (c) (ii) of regulation 3(2) was not accurately reflected in the model agreement.

The agreement states that this requirement applies only to the success fee, whereas it was argued that the regulation applied it to all fees.

The court found that the model CFA created by the Law Society does not accurately reflect the wording of regulation 3(2).

This decision will affect virtually all CFAs in use as the wording of the model also occurs in model agreements issued by other organisations.

What is surprising about this decision is that in its consultation document issued in the summer of last year, the Department for Constitutional Affairs (DCA) set out its reading of the regulation in question.

The DCA understanding of it was the same as that used in the Law Society model agreement.

The DCA consultation document said: 'Regulation 3(2) relates to the consequences for the solicitor and client of entering into the CFA with a success fee.

It provides for disclosure to the court of the reasons for setting the success fee at a given level; the ability for the solicitor to recover the disallowed element of the success fee where the court approves and prevents the solicitor from agreeing with the paying party to a lesser success fee and recovering the difference from the client unless the court allows otherwise.'

It is hoped that the Court of Appeal will reverse the decision, if the point is before it, in the near future.

Moreover, this appears to be the type of technical challenge that the Court of Appeal was so keen to discourage in the judgment of Hollins v Russell and other appeals [2003] EWCA Civ 718, [2003] All ER (D) 311 (May).

However, the court found that the CFA was still enforceable.

This was on the basis that the breach was not material, using the test set by the Court of Appeal in Hollins.

In that case, the court suggested that courts should ask themselves: 'Has the particular departure from a regulation pursuant to section 58(3)(c) of the 1990 Act or a requirement in section 58, either on its own or in conjunction with any other such departure in this case, had a materially adverse effect either upon the protection afforded to the client or upon the proper administration of justice?' If the answer is yes, the conditions have not been satisfied.

If the answer is no, then the departure is immaterial and (assuming that there is no other reason to conclude otherwise) the conditions have been satisfied.

In Ghannouchi, the reasons given for saying that the breach was not material were that there was a detailed assessment in this case and there is a procedure for a court to decide whether a client can be charged the excess where there has been an agreement of costs.

Therefore, the court said the protection afforded to the client was better than that set out in the agreement, rather than being adversely affected.

These circumstances will occur in virtually every case, with the result that although the model has been found to contain a technical breach of the CFA regulations, clients should still be able to recover their costs as the breach will not be material.

The Law Society will consider revising its model agreement if the matter does not come before the Court of Appeal in the near future.

In the meantime, receiving parties may decide to argue the construction point, as the SCCO decision is one of first instance and is therefore not binding on other courts.

The Law Society would be interested to learn of any other cases where this point has been raised, and the outcome.

Gary Barker is head of practice development at the Law Society