Rocky terrain – funding update

Blasts from the past

The requirements for Conditional Fee Agreements (CFAs) was initially provided in the Conditional Fee Agreements Regulations 2000. These regulations were onerous and cumbersome to comply with, and lead to a flood of satellite litigation in which Defendants argued that the regulations had been breached and therefore they did not have liability for costs. The consequences of a successful challenge are huge – the solicitor could not recover any fees at all, neither from the Defendant nor from the client.

The regulations were revoked on 1 November 2005 and not replaced, and do not apply to CFAs entered into on and after that date. But, we are still seeing cases which involve CFAs entered into under the ‘old’ pre-November 2005 regime, and are likely to do so for a few years to come.

Applying the success fee in discounted CFAs

The usual CFA is where the lawyer agrees to charge nothing if the case does not succeed, and basic rates plus a success fee if the case does succeed. The justification for the success fee is that the lawyer takes the risk that he or she will be paid nothing if the claim fails, and can accordingly charge a success fee uplift if it transpires that the claim succeeds.

There are, however, a number of possible variations of CFAs and there seems to be growing confidence in the market in relation to entering into more novel arrangements. Cases involving some of these less usual arrangements are reaching the Courts and producing their own body of case law. For example, Gloucestershire County Council v Evans ¹ (June 2008), which reached the Court of Appeal, involved a discounted CFA. Under this type of agreement, the lawyer agrees to charge a specified rate if the case succeeds (and possibly a success fee on top) and a lower, or ‘discounted’, hourly rate if the claim fails. In Gloucestershire County Council the arrangement was that the Claimant would pay a discounted hourly rate of £95 if he lost the case and £145 if he won. The obvious difference between this arrangement and the more usual CFA is that the lawyer will be paid something, win or lose. The case succeeded, and the question before the Court of Appeal related to how the success fee should be applied.

The Claimant sought to charge the success fee on the full hourly rate of £145, whereas the Defendant argued it should only be charged on £50, being the difference between the £95 that would be charged if the case failed and the £145 that would be charged if the case succeeded. This was on the basis that only £50 was ‘at risk’.

The Court of Appeal rejected the Defendant's argument and allowed the success fee to apply to the full £145, since the notion of ‘costs at risk’ was not recognized by section 58 of the Courts and Legal Services Act 1990.

The decision enabled the Claimant's solicitor to charge a success fee of 100% on the full hourly rate, even though almost two-thirds of the rate would have been paid whether the case succeeded or not. However, there has been concern about the appropriateness of this approach. For example, Tony Girling and Robert Lowe ² refer to the unreported 2003 decision of Master Hurst, ³ Designer Guild Ltd v Russell Williams, in which he approved a discounted CFA which provided for Counsel to charge half of his fees even if unsuccessful, and a 50% success fee if successful. Master Hurst held that as half the fees would be paid anyway, the appropriate success fee was 50% and that a success fee of 100% would have been reasonable had Counsel been acting on a no-win no-fee basis. It is unlikely that Gloucestershire County Council will be the final word on the matter and further litigation is likely.

As a helpful practice point, the Court of Appeal in Gloucestershire County Council said, obiter, that it is important to describe the arrangement in the CFA as providing for a discount in the hourly rate, rather than an increase in the hourly rate. This is to avoid any confusion between the increase in the hourly rate and the success fee.

Slashing success fees

Over the past few years, there has been a considerable willingness by the Courts to reduce the success fee sought by the Claimant, on the basis that it is not based upon a reasonable assessment of the risk of the case not succeeding as assessed at the time the CFA was entered into. There do not seem to have been as many cases recently in which the level of success fee has been challenged, and it is quite unusual these days for challenges to reach the Court of Appeal. No doubt this indicates a greater willingness between the parties to reach agreement, rather than that the challenges have gone away! However, of the cases that do reach Court, it is clear that the Courts are still very willing to put success fees through the guillotine. For example, in C v W ⁴ (December 2008), a road traffic accident case, the Claimant entered into a CFA with a success fee of 83% shortly after liability had been admitted at an early stage. The District Judge allowed a success fee of 70%. On appeal it was reduced to 50%, and further by the Court of Appeal to 20%!

The risk that needed to be assessed in C v W was the risk that the Claimant may fail to beat a Part 36 offer. The fact that three different Courts came up with three different success fees, ranging from 70% to 20%, shows just how much subjectivity there is in assessing the degree of risk. Ultimately, the Court of Appeal felt that it was unlikely that highly experienced solicitors practising in that field would differ widely in their assessment of an offer, and that accordingly 20% was appropriate. Lord Justice Thomas wondered whether it is worth considering a new regime for cases where liability is admitted. I think it would be difficult to come to any hard and fast rules specifically in relation to cases where liability is admitted, because the risk on quantum will still vary between cases.

Proving compliance is essential

A common theme which has run through the CFA cases over the years is the importance of not only complying with the requirements, but making sure you can prove compliance. There have been more examples of this. In Bray Walker Solicitors v Silvera ⁵ (December 2008), a number of CFAs were terminated by the solicitor after the client refused to accept advice that a Part 36 offer should be accepted. Under the Law Society Model CFA, the solicitor was entitled to charge the client basic fees, which were £350,000, but the client said that he had not been informed of his potential costs liability in these circumstances and that there had been a number of breaches of the Conditional Fee Agreements Regulations 2000. This particular CFA fell under the ‘old’ pre-2005 regime.

The Claimant's solicitor was able to produce various documents and evidence which supported the assertion that the appropriate advice had been given and the Court found in his favour. The Hon Mr Justice Blake stated ominously that the case ‘is a cautionary tale as to the perils likely to be encountered’ in pursuing costs in unsuccessful litigation that has been funded by a CFA.

Retrospective success fee upheld

Many of us will have entered into CFAs which include a term that the success fee will cover a reasonable period for the investigation into whether a CFA is appropriate, rather than relating only to work done after the date of the agreement is signed. This means that the CFA is retrospective, but only for a short period – a matter of weeks – while Risk Assessment, advising the client, and the agreement is prepared. I suspect that many of us have not entered into a CFA which applies retrospectively for periods much longer than this, and the very concept of a retrospective CFA arguably flies in the face of the principle that the risk has to be assessed at the outset without the benefit of hindsight. However, we now have the decision of Mr Justice Clarke, Birmingham County Court v Rose Forde ⁶ (January 2009), which permitted a retrospective CFA for fees incurred for over a year.

The case was an appeal from Costs Judge, Master Campbell, in which the Claimant had entered into CFA 1 in March 2005, with no success fee. The validity of a number of CFAs in other cases had been challenged by the Defendant so, in April 2006, over a year later, the Claimant entered into a new agreement, CFA 2. The second agreement, unlike the first, did include a success fee and was said to cover work from ‘when you first instructed us’. An issue in the case also related to the solicitors obligation to serve Notice that a CFA had been entered into, under Civil Procedure Rule 44.15 and Section 19 of the Costs Practice Direction. In the case, no new Notice was served for CFA 2. A few days after signing the second agreement, the case settled.

On appeal, Mr Justice Clarke upheld the validity of the second agreement, despite the fact that it applied retrospectively. Master Campbell, in the Court below, had held that the success fee was irrecoverable due to the failure to serve Notice and, by the time of the appeal, the Claimant was no longer seeking a success fee.

In relation to retrospectivity, the Defendant relied on Master Hurst's decision in Adam Musa King v Telegraph Group ⁷ that allowing a retrospective success fee means that the solicitor will not, in reality, have done the work on the basis of the risk he agreed, and that the success fee should not apply to past risk. In contrast, the Judge considered obiter comments in Homes v Alfred McAlpine Homes (Yorkshire) Ltd ⁸ , that a retrospective success fee would not be objectionable.

Mr Justice Clarke's conclusion was that a retrospective success fee was not contrary to public policy. This was so even though some of the work had been done under the pre-November 2005 requirements, which had not been met, and the success fee covered a period during which no Notice of the additional liability had been given under the Civil Procedure Rules and Practice Direction. It was recognized that in accordance with Form N251 there was no obligation to state the amount of the success fee, nor the fact that it was retrospective.

It has been said that there is no doubt now that it is permissible to have a CFA with retrospective effect. However, there must be considerable caution. First, the decision is only at first instance. Second, it contradicts the opinions of eminent Costs Judges. Third, it is only obiter dicta in relation to the success fee because at the time of the Hearing no success fee was being claimed. And fourth, if retrospective CFAs do become more prevalent, this case certainly will not be the final say on the matter. In addition, it is suggested that if a retrospective CFA is entered into the Defendant should be advised of this in a covering letter, to mitigate any arguments based on prejudice.

Third-party funding raises its profile

Third-party funding is described by Cook, in Cook on Costs 2009, as ‘the commercial funding of litigation by individuals or companies who have no previous connection with the litigation with a view to making a profit out of it’, and is gaining prominence in all areas of litigation. Indeed, Cook's latest edition has, for the very first time, a chapter dedicated entirely to it. There have been some interesting cases on third-party funding, a couple of which are set out below.

The possibility of third-party funding means that, of course, a solicitor can be found to have been funding a case, and accordingly be held responsible for the Defendant's costs if the Claimant can not satisfy an Order to pay these. This was the basis of the Defendant's claim in the case of Clarke v Oldham Metropolitan Borough Council & Smith Jones Solicitors ⁹ (April 2008). The Claimant's solicitor had entered into a CFA and recognized the need for after-the-event insurance cover to protect the client against having to pay the Defendant's costs if the claim did not succeed. An application to an after-the-event insurer was made, and refused. Nothing further was done, so the case proceeded without insurance in place. Along the way, there was a wasted costs order against the Claimant's solicitors, for £306, which was paid for by the Claimant's solicitor from an office accountant, without anything on the file making it clear that this would have to be repaid by the client. The claim failed and the Claimant was ordered to pay the Defendant's costs, but did not have the means to do so.

The Defendant pursued the Claimant's solicitors under s 51 of the Supreme Court Act 1981 for an Order that they should pay its costs, and succeeded on the basis that the solicitor had a financial interest in the outcome. The two key factors that resulted in the Order being made were the lack of after-the-event insurance and the wasted costs order. The relative significance of these is not evident from the Judgment, but what is clear is that care needs to be taken to avoid inadvertently becoming a funder and thereby becoming potentially liable for the losing party's costs.

By way of contrast, in Samuel v (1) Swansea City & County Council, (2) Europ Assistance Insurance Ltd ¹⁰ (July 2008) the Defendant pursued the after-the-event insurer for third-party costs, in circumstances where the Claimant was impecunious. The Court did not rule out the possibility of an insurer being a third-party funder, but only if the insurer had substantially controlled the litigation which was not the case here.

Dangers of giving too much

Although we always want to do our best for clients, there is considerable danger in wilfully giving too much assistance. Dix v (1) Townend (2) Frizzell Financial Services ¹¹ (June 2008) involved a challenge to a clause in the CFA in which the solicitors agreed to indemnify the Claimant against his opponent's costs if the claim failed. It was held that the uncapped potentially large liability, unsupported by after-the-event insurance, rendered the agreement champertous and unenforceable. It was unrealistic to expect the solicitor to have been able to keep a proper distance from the case.

Obligation to pay costs must be clear

The case of Moreira v Grench ¹² (September 2008) is a stark reminder to us to ensure that provision for payment of costs if a claim succeeds is made clear in negotiations. The Claimant pursued a road traffic accident claim under a CFA, and a stage was reached by which the Claimant had been paid by way of interim payments the full amount of compensation claimed. When the Claimant claimed its costs, the Court held that there had been no agreement that the Defendant should be liable for these.

CFA Lite

A CFA Lite is a CFA in which the client is liable for his or her solicitor's fees and expenses only to the extent that these are recovered from the Defendant. In Mckillop v TNT UK Ltd ¹³ (April 2008) it was held that a CFA that referred to a ‘no costs to you service’ fell within this category.

Part 36 risks given appropriate recognition

There have not been as many cases involving after-the-event insurance recently, compared with previous years, which may reflect a settling in the approaches that are being adopted. The case of Avril v Boultby ¹⁴ (May 2008), is of interest albeit that it is a County Court decision. The case involved a road traffic accident in which there had been an early admission of liability. Soon after, the Claimant entered into a CFA backed by after-the-event insurance. Subsequently, the Defendant argued that it should not be liable to pay the after-the-event insurance premium, in light of the admission. On detailed assessment, the Judge held that the premium had been justified because of the risk that the offer could be withdrawn and the failure to beat a Part 36 offer.

One of the arguments raised by the Defendant was that the case was similar to those in Tranche 1 of the Claims Direct Cases in 2002, in which Master Hurst said:

‘Where an accident occurs, particularly a minor road traffic accident causing slight injury … And where the liability insurer has from the outset accepted liability for the occurrence, it will generally be disproportionate and unreasonable to take out ATE policy.’

The Judge in the present case stated that while Master Hurst's opinion carried enormous weight, he was ‘not entirely sure that now, 6 years later, he would have expressed himself quite as he did’. In any event, Master Hurst was not asked to consider the possibly dramatic effect of a failure to beat a Part 36 offer.

Avril illustrates a commonsense approach to after-the-event insurance premiums to reflect the risks associated with failing to beat a Part 36 offer. It protects Claimants against having to pay the premium from damages which, on many occasions, would significantly reduce or obliterate damages. I understand that the intended appeal to the Court of Appeal has been withdrawn.

Disclosure of interest test based on ‘reasonable person’

Under the ‘old’ regime, regulation 4(2)(e)(ii) of the Conditional Fee Agreements Regulations 2000 imposed an obligation on the solicitor to declare whether he had an interest in recommending a particular after-the-event insurance policy. Over the years, there has been a considerable amount of case law about the nature of this obligation and the specific information that needed to be provided, and the point reached the heights of the Court of Appeal at the end of 2008. Kier Tankard v John Fredricks Plastics Ltd et al. ¹⁵ (December 2008) involved conjoined appeals in which the solicitors were members of a scheme known as Accident Line Protect and had recommended its after-the-event insurance policy. The Court of Appeal held that a solicitor had an interest in recommending a particular contract of insurance to his client if a reasonable person with knowledge of the relevant facts would think that the existence of the interest might affect his advice. In the cases before the Court, there was nothing that would lead a reasonable person with knowledge of the facts to think that the solicitors had an interest in the scheme that might affect their advice. Obiter, the Court added that it was not sufficient for a solicitor simply to say he had an interest, rather he had to identify the nature of the interest.

Cooling off

The Cancellation of Contracts made in a Consumer's Home or Place of Work etc Regulations 2008 came into force on 1 October 2008, and provide a minimum 7-day cooling-off period and cancellation rights for consumers in relation to contracts entered into at home, work, at a home of another individual or on excursions. While the primary purpose of the regulations is to protect consumers from unscrupulous double-glazing sellers and the like, it is thought that it also applies to CFAs entered into at a client's home. Under the regulations, written notice of the right to cancel must be given at the time the contract is made. By the time this article is published, there should be a Law Society Practice Note dealing with this.

No change in approach to failure to give notice

Over the years, there have been a number of cases where relief from sanction has been sought after failing to comply with the Notice requirements. There have been no significant changes in 2008 or this year to the Court's approach and the Court continues to consider whether there has been prejudice caused by the failure. For example, in Supperstone v (1) Hurst and (2) Hurst ¹⁶ (April 2008), there had been a failure to give appropriate Notice, and relief from sanction was granted because the opponent would not have acted differently if Notice had been given properly.

A more Claimant-friendly approach

Under the ‘old’ regime, there was a specific requirement under regulation 4(2)(c) of the Conditional Fee Agreements Regulations 2000 to ascertain whether a client had funding under a before-the-event insurance, and there has been a considerable amount of case law relating to what kind of enquiries had to be made to comply with this requirement. The usual challenge by Defendants is to argue that appropriate enquiries have not been carried out, therefore the regulations have been breached, and the Defendant has no obligation to pay costs.

The more Claimant-friendly approach that we have seen to challenges recently continued last year. For example, in Smith v Wilson ¹⁷ (May 2008), a road traffic accident case, funding was provided by a CFA and comprehensive motorcycle before-the-event insurance cover which, unusually, provided extensive cover for both sides' costs. The Defendant argued that adequate enquiries into the existence of other possible before-the-event policies, such as household policies, under regulation 4(2)(c) of the Conditional Fee Agreements Regulations 2000 had not been made. The Court disagreed and held that, in any event, to make further enquiries may have been detrimental if there had been another policy and both were vitiated as a result.

The Defendant's similar challenge also failed in Woolley v Haden Building Services Ltd ¹⁸ (February 2008), in which a file note confirming that funding had been discussed at the first meeting and a pro forma document containing costs information showed adequate enquiries. The solicitor had asked the client to check the household contents insurance for legal expenses cover without checking it himself. Also, in Bray (see above) the Court provided that if the client or context suggested that there might be before-the-event insurance cover then there was a duty to investigate. It did not require detailed enquiry into something that there was good reason to believe not to exist.

Although the cases above involve pre-November 2005 Conditional Fee Agreements, the guidance is helpful and relevant to our current duty under Rule 2.03 of the Solicitors Code of Conduct to consider the funding options.

A similar approach has been shown in cases covered by the fixed costs regime for road traffic accidents under Civil Procedure Rule 45.11(1), and solicitors have been allowed to claim success fees even though the client had adequate before-the-event cover, see for example the Court of Appeal case of Kilby v Gawith ¹⁹ (May 2008). It would be dangerous to deduce too much from these cases in relation to funding of clinical negligence claims as the fixed costs scheme for road traffic accidents effectively gives a statutory entitlement to a success fee.

It's all change

Public funding is under review across the board, and there remains the constant threat that it will be withdrawn for clinical negligence at some point. The last few years has seen a plethora of investigations, including in relation to the introduction of Preferred Supplier status and Best Value Tendering. In October 2008, the Legal Services Commission produced ‘Civil Bid Rounds for 2010 contracts: A Consultation’, which requires legal aid providers to put forward a tender for a Legal Services Commission contract. On page 6 it states: ‘In reality, the great majority of providers can expect to obtain renewed contracts if they wish to sign up to the new terms’. The key objectives of the proposals include delivering a more integrated service, ensuring clients receive an appropriate service, and to ensure that providers are able to bid for sufficient volumes of work to enable delivery of a full breadth of services that are readily available and accessible to clients.

In addition, there has been the welcomed introduction of a Funding Checklist, as an alternative to the cumbersome Case Plans, in a bid to reduce the administrative burden of public funding.

Reviews in abundance

The last 18 months has seen Claimant lawyers being criticized repeatedly for high fees, including by the Lord Chancellor Jack Straw who expressed concern that lawyers were scandalously ‘ramping up their fees’. This has led to a number of investigations, briefly as follows:

Lord Justice Jackson is undertaking a fundamental review of costs, the results of which are due at the end of 2009;