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Costs and conditional fees: an update

Litigation based on Defendants seeking to establish that conditional fee agreements are unenforceable due to non-compliance with the Conditional Fee Agreements Regulations 2000  continues to be a primary focus in the costs arena. 

This article is an update of the article initially posted on 10 January 2007.

Litigation based on Defendants seeking to establish that conditional fee agreements are unenforceable due to non-compliance with the Conditional Fee Agreements Regulations 2000  continues to be a primary focus in the costs arena. 

The argument runs that if the agreement between the solicitor and his client is unenforceable then the indemnity principle precludes the recovery of any ‘between the parties’ costs.  

The Regulations do not apply to CFAs that have been entered into since 1 November 2005 (see the Conditional Fee Agreements (Revocation) Regulations 2005) but continue to apply to the many CFAs entered into before that date. Nevertheless, thousands of CFAs were entered into before that date.  

Solicitors who had acted in breach of the CFA Regulations 2000 faced difficulty in the cases of Garrett v Halton BC and Myatt v National Coal Board [2006] EWCA Civ 1017. These cases concerned regulation 4(2)(c), which requires the solicitor to inform the client whether he considers that the client's costs risk is insured under an existing contract of insurance, normally a before-the-event (BTE) policy. 

The court gave general guidance as to the scope of the solicitor's duty under regulation 4(2)(c). The court held that there was an implied obligation on a solicitor to take reasonable steps to ascertain what BTE cover the client had. What was reasonable would depend on all the circumstances of the case. 

Relevant factors are:

  • the nature of the client;
  • the circumstances in which the solicitor was instructed;
  • the nature of the claim;
  • the cost of the after-the-event (ATE) premium if one had to be purchased; and
  • whether a referring body had already investigated the availability of BTE.

The regulation involved in Garrett (one of the conjoined appeals in Myatt) was 4(2)(e)(ii), which requires the solicitor who recommends a particular policy of insurance to declare any interest he may have in doing so. A claims management company had referred the case to the solicitor and it was found to have been a term of the solicitors' panel membership that they should recommend the policy of insurance promoted by the claims management company, with exclusion from the panel as a sanction for failure to comply.  

The solicitors had declared that they had no interest in recommending the policy on the basis that they got no commission for doing so. They had declared their panel membership, but without saying what that entailed. The court upheld the first instance decisions that the link between recommending the insurance policy and panel membership was an interest that should have been disclosed.  

This decision can, for now, be confined to those CFAs entered into before 1st November 2005. After that date, when the 2000 Regulations are revoked, primary responsibility for client care is focused on solicitors and the Law Society’s professional Rules of Conduct, supporting costs guidance and proposed new model CFA agreements. It is open to argument whether a paying party can rely on a breach of Solicitors Practice Rule (provision of information about costs) in an attempt to strike down the agreement, but it is clear that the intention of shifting the 'consumer protection' aspects from a statutory footing to the professional conduct rules is that it will be less likely that minor failures fully to comply will result in disproportionate sanctions. 

There are two other noteworthy recent cases, both of which relate to the way in which success fees are calculated. The first case is Oyston v Royal Bank of Scotland [2006] EWHC 90053 (Costs) in which the matter was funded by way of a CFA which provided for a success fee of 100%. Mr Oyston suggested that his solicitors could have a bonus of £50,000 if they succeeded in recovering over £1,000,000 for him. The CFA was amended accordingly. 

In the event, Mr Oyston won his claim but he recovered less than £1,000,000. As a result, the bonus was not payable. The paying party argued that the CFA was unenforceable because the success fee was over 100%, i.e. potentially it was 100% plus £50,000. Master Hurst found for the paying party. He rejected Mr Oyston's argument that the time to examine unenforceability was at the date of assessment rather than at the time the CFA was entered into. He found that the CFA was in clear material breach of s.58(4) of the Courts and Legal Services Act 1990 (as amended). It was, therefore, found to be unenforceable. 

In the second case, Brennan v Associated Asphalt Limited [2006] EWHC 90054 (Costs), the paying party took the point that the amount of the postponement charge was not specified in the CFA and that this was a breach of regulation 3(1)(b) of the Conditional Fee Agreements Regulations 2000 (SI 2000/692). Master Hurst made the following comments:
"In my judgment reg 3(1) of the 2000 Regulations is perfectly clear. The CFA must specify how much of the percentage increase relates to the cost of postponement. In my view the words 'if any' do not mean that if the deferral element is nil there is no need to mention it. Those words are there to ensure that the client is left in no doubt as to the position, even if the deferral element is nil. In those circumstances I find that there has been a breach of the regulation." 

However, the Master went on to find that the failure to specify a postponement element meant that nothing in respect of this would ever be recoverable from the client, and that as a result, the breach was of no material effect. The CFA was held to be enforceable.

The significance of both Oyston and Brennan is that the receiving party deployed a retrospective deed of rectification to overcome the supposedly defective elements of a CFA (although in Brennan the point was abandoned at the hearing). In each case the court did not need to decide the enforceability of the CFA solely on the basis of deeds of rectification, and whilst in Brennan Master Hurst was sceptical ("Nor is there any need for me to come to a concluded view about the deed of rectification... it is clearly open to severe criticism, and may indeed not be effective to bring about its intended result, certainly so far as the paying party is concerned..."), the issue is certainly not closed. The prospects of costs draftsmen carrying a sheath of signed deeds of rectification to be deployed at will at a costs hearing is bound to be greeted with customary scepticism by costs judges (see Oyston para 59), but the legitimate deployment of a retrospective deed of rectification is a point that may receive closer judicial consideration. The issues are likely to be enforceability of a deed that pre-dates the costs order and evidence of the lay client's true intentions in entering into the deed of rectification.

The recent case of Rogers v Merthyr Tydfil[2006] EWCA Civ 1134supported the way that after-the-event (ATE) insurance operates. This was the first occasion on which the reasonableness of an ATE premium had been considered authoritatively since Callery v Gray (No 1 and No 2) [2001] EWCA Civ 1246. In Rogers damages were agreed in the sum of £3,105 plus interest. The DDJ allowed an ATE premium of £5,103, being £4,860 premium plus premium tax. In this case there was a three-stage premium (£450 at outset, a further £900 when proceedings were issued and a further £3,510 sixty days before trial). The Defendant appealed the order. The Judge on appeal reduced the premium to £900 and said that was a more reasonable sum to pay.

The main issue for the court was: what is the proper approach to proportionality in a low value personal injury case where the ATE premium may appear large in comparison to the amount of damages? The Appeal Court held that the question of proportionality should not be determined by the level of damages. The real question is, whether it was necessary to incur the premium. The fact that the premium was large in comparison to the agreed damages did not necessarily mean it was disproportionate. It was said that it is not legitimate to compare the total premium payable at the third stage of a three-stage premium model with the single premium, because a three stage premium might be cheaper at the first stage than a one stage overall. The vast majority of cases settle pre-issue and thus it would be cheaper overall to the Claimant

This type of litigation is likely to continue. November 1, 2005 has not brought an end to technical costs litigation but has simply changed the arguments to be deployed.