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Whether fees are profit costs or disbursements

2010-03-31T08:38:33Z

Crane –v- Canons [2007] EWCA Civ 1352

The case of Crane –v- Canons [2007] EWCA Civ 1352 has dealt with the issue of whether fees charged by costs consultants are profit costs or disbursements. This issue is relevant to the amount of costs that can be recovered in certain cases as it is the basis for whether a success fee can be charged for the work carried out by costs consultants where solicitors are instructed on a conditional fee basis.

In its decision the Court held that the fees charged by costs consultants in relation to the assessment proceedings were profit costs and that under the collective conditional fee agreement a success fee was recoverable on those costs.

May LJ started by describing the case as “having an unsavoury flavour to it” but in his leading judgment he considered the wording of claimant’s collective conditional fee agreement and the case law in relation to whether work done was a profit cost or a disbursement.

He endorsed Master Hurst’s view that the “characteristic of whether charges of a person engaged by solicitors are profit costs or disbursements is whether the solicitors have a personal responsibility to the client for work done”. He went on to find that the work carried out by the costs consultants was essentially solicitors’ work and although the claimant’s solicitors chose to delegate that work, they retained control and supervision. In those circumstances the costs draftsman was effectively acting as the solicitors’ temporary employee and the solicitors remained liable to the client for any negligence in the conduct of the costs assessment. The Court therefore held that a success fee was recoverable on the work carried out by costs consultants on behalf of the claimant’s solicitors.

The Court also gave consideration to the submission that there should be a reduced success fee for work carried out in relation to costs only proceedings to reflect the lower risks of costs only proceedings. Again, the Court of Appeal rejected this proposition and at paragraph 21, May LJ stated:

“There is no reason of principle which compels the court to require parties who enter into CFAs to address at the outset the risk of costs proceedings separately and in my judgment there are clear reasons of policy for the court not to require this. There is a general sense if CFAs are to be a substantial means of financing civil litigation that they should not be overcomplicated, that costs should be agreed wherever possible, and that, if there to be contest costs proceedings, the means whereby the winning solicitors finances litigation which he loses should extend to the costs proceedings at the same rate as the proceedings themselves.”

Claimant solicitors need to bear this case in mind when drafting and checking bills of costs. Where claimant solicitors are acting under a conditional fee agreement and a costs consultant has been instructed to carry out the solicitors’ work for which the claimant’s solicitors remain responsible a success fee can and should be recovered.

Defendant solicitors also need to be mindful of this decision where calculating Part 47.19 offers and more broadly when considering the risks of continuing to a detailed assessment hearing.

More generally May LJ’s comments at the commencement of his judgment are reminiscent of previous comments regarding satellite litigation and the description of costs litigation as a “blot on the civil justice system” (Latham LJ in Burnstein –v- Times Newspapers [2002] EWCA Civ 1759). This should serve as a reminder to all parties that the courts do not look kindly upon satellite litigation regarding costs, particularly when damages are low, as in this case (a settlement of £1,500).

Kirsty McKinlay
24 January 2008
Young Street Chambers

Kirsty McKinlay is a tenant at Young Street Chambers in Manchester specialising in the areas of personal injury, clinical negligence and costs.

Young Street Chambers civil clerks Paul Reeves and Rachel Campbell can be contacted by telephone on 0161 833 0489 or by email: clerks@young-st-chambers.com

Technical Challenges to CFAs and CFA Lites Jones -v- Wrexham

2010-03-31T08:35:32Z

Despite the abandonment of the CFA Regulations 2000 in November 2005 the technical challenges in relation to CFA’s just keep coming! As pointed out by Waller LJ in his leading judgment there are still plenty of pre-November 2005 CFAs around giving rise to technical challenges upon assessment of costs.

The case of Jones –v- Wrexham was the first time that the Court of Appeal had to consider the amendments brought about by the Conditional Fee Agreements (Miscellaneous Amendments) 2003 and specifically Regulation 3A of the CFA Regulations 2000. The relevant parts of Regulation 3A are set out as follows:

1. This regulation applies to a conditional fee agreement under which, except in the circumstances set out in paragraph (5), the client is liable to pay his legal representative's fees and expenses only to the extent that sums are recovered in respect of the relevant proceedings, whether by way of costs or otherwise.

2. In determining for the purposes of paragraph (1) the circumstances in which a client is liable to pay his legal representative's fees and expenses, no account is to be taken of any obligation to pay costs in respect of the premium of a policy taken out to insure against the risk of incurring a liability in the relevant proceedings.

3. Regulations 2, 3 and 4 do not apply to a conditional fee agreement to which this regulation applies…

The facts of the case were that the claimant had funded litigation against the defendant by way of a CFA. The claimant had also entered into a loan agreement and an insurance policy and was represented solicitors who were on the insurers’ panel. At the outset of the matter the claimant’s solicitors sent to the claimant a client care letter asking the claimant to sign the CFA and recommending insurance with the insurer. The client care letter included an assurance by the claimant’s solicitors that, provided the claimant cooperated with her solicitors and did not withdraw her instructions, the solicitors would recover their costs from the defendant and the client would not have a bill to pay. This was also set out in the CFA in which it was stated that where the case was won the Claimant’s solicitor would waive any portion of costs not recovered from the Defendant. However the CFA also provided that where the case was lost the Claimant was liable to pay her solicitors disbursements. In those circumstances the claimant had taken out the policy of insurance which would pay the disbursements and so they would be “recovered” from the insurers.

The terms of the CFA stated that the insurer's litigation insurance cover was "only made available to you by solicitors who have joined the scheme" but the final term of the CFA itself stated that the claimant’s solicitors "did not have an interest in recommending this particular insurance agreement".

At first instance before District Judge Fairclough the Defendant argued that the CFA was unenforceable for breach of the CFA Regulations 2000 and that it did not fall within the exception created by Regulation 3A. However the District Judge found that, in light of the client care letter and the recoverability of disbursements under the insurance policy, the CFA fell within Regulation 3A of the 2000 Regulations and therefore that the CFA Regulations 2000 at 4(2)(e)(ii) had no application and the CFA was enforceable.

The matter then went to His Honour Judge Holman on appeal who found that the CFA did not come under Regulation 3A and that the CFA was unenforceable as the claimant’s solicitors had failed to inform the claimant of an “interest” pursuant to Regulation 4(2)(e)(ii) of the CFA Regulations 2000. The decision that the CFA did not come under Regulation 3A was founded upon the basis that the client care letter was not an admissible resource when construing the CFA. Moreover if the fees could be met by insurance it followed that liability for costs remained with the client, since an insurance company simply acted to indemnify a claimant against a liability.

On appeal the claimant submitted that the claimant's CFA made her liable only for fees and expenses that she would recover by way of costs "or otherwise" in accordance with the meaning of those words as used in Regulation 3A(i). The claimant submitted that the words "or otherwise" included a situation where the claimant recovered under an insurance policy what she might otherwise be liable to pay to her solicitor, so that such a CFA was within Regulation 3A.

The Court of Appeal considered the issue and found that the CFA was a CFA “Lite” and that therefore under Regulation 3A the CFA was enforceable. There was no reason why as a matter of language, "or otherwise" could not include recovery under an insurance policy.

The Court also found that the correct approach to construing a CFA agreement was to look at the whole package produced by the solicitor: the CFA agreement, the client care letter explaining the effect of the agreement and the insurance policy recommended by the solicitor. The question that should be asked was whether the solicitor had produced an arrangement for a CFA under which the claimant would not be liable for any own-side costs or expenses (apart from the circumstances defined by Regulation 3A(5) of the 2000 Regulations) other than those that were actually recovered from the other side or from insurers.

The issue of whether a CFA is a CFA Lite depends upon the construction of the agreement between the solicitors and the claimant and since the agreement in the instant case was, so far as the claimant was concerned, there would be a waiver (except to the extent that there was recovery either from a losing defendant or under an insurance policy) so that unless the claimant withdrew instructions she had no liability for costs. Therefore the CFA in the instant case was a "CFA Lite” and pursuant to the Regulation 3A, compliance with Regulation 4 was not required.

The Court of Appeal went on to consider whether, had Regulation 3A not applied, there would have been a breach of Regulation 4(2)(e)(ii) of the CFA Regulations 2000. The Court of Appeal found that the case of Garret –v- Halten [2006] EWCA Civ 1017 would apply and, despite the best efforts of the claimant’s counsel could not be distinguished. In this case the claimant’s solicitors clearly had an interest that should have been disclosed and, if the CFA had not been a CFA Lite, there would have been a breach of Regulation 4(2)(e)(ii).

As indicated by Waller LJ this case was particularly important as a number of CFAs were at risk if the Court of Appeal found that Regulation 3A did not apply and that therefore Regulation 4 did apply! As claimant solicitors will be aware, although the CFA Regulations 2000 were abandoned in November 2005 there are still several pre-2005 CFAs under which costs are sought. Following this decision where there is a challenge on the basis of a breach of the CFA Regulations 2000, claimant solicitors should check the entirety of their CFA documentation carefully. This includes the CFA itself, the insurance policy and the client care letter. In this case Mr Morgan QC, acting for the defendant, suggested that the application of Regulation 3A had occurred by chance and not by design and that may be the case with other claimant solicitors! Where there is a waiver of fees not recovered or where there has been a written assurance that the claimant will not have to pay any costs not recovered from the defendant or the insurer, (as long as the claimant does not withdraw instructions) any such challenges may be rebuttable depending on the construction of the CFA.

Kirsty McKinlay
24 January 2008
Young Street Chambers

Kirsty McKinlay is a tenant at Young Street Chambers in Manchester specialising in the areas of personal injury, clinical negligence and costs.

Young Street Chambers civil clerks Paul Reeves and Rachel Campbell can be contacted by telephone on 0161 833 0489 or by email: clerks@young-st-chambers.com

CPR 45 - 100% Uplifts

2010-03-31T08:32:11Z

Claimant solicitors beware!! In the case of Re Sitapuria heard in Liverpool in December 2007, His Honour Judge Stewart found that for the purposes of 45.16 and 45.17 solicitors and counsel are only entitled to 100% success fee if the case is actually opened in court.

Upon that basis where disposals or trials are settled by consent on the day of trial at the doors of the court this will not warrant a 100% uplift as the matter is not concluded at trial!

To date the case has not been reported and I am not aware of the detailed reasoning but watch this space for more information as to the reasons for the judgment when this becomes available.

Kirsty McKinlay
9 January 2008
Young Street Chambers.

CPR 45 Section III: Is success worth 100%?

2010-03-30T15:33:46Z

The object of the fixed success fee scheme set out in CPR 45 Section III was to achieve certainty and avoid litigation over the amount of the success fee. Unfortunately (as some may have anticipated!) there are already issues in relation to when a 100% success fee may be allowed and when it may not. This article considers some of the issues that have already been explored as to when a 100% success fee may be recovered and when it may not.

Where liability is not disputed and the matter proceeds by way of disposal

This issue arises where there is no issue as to liability and judgment is entered and the matter listed for a disposal hearing pursuant to CPR 26PD.12. The question that was posed in the case of Watson –v- Gray, 8 February 2005, Unreported was whether a disposal hearing is a “trial” for the purposes of CPR 45. It may, prima facie, appear that CPR 45.15(6)(b) is clear in relation to this in stating that “a reference to a ‘trial’ is a reference to the final contested hearing or to the contested hearing of any issue ordered to be tried separately”. Nevertheless the question was conclusively dealt with by His Honour Judge Stewart QC in the case of Watson –v- Gray.

The case concerned a matter funded under a CFA which concluded at a disposal hearing. At first instance the Deputy District Judge awarded damages to the Claimant but only allowed a 25% success fee. The Deputy District Judge’s reasoning for this was that liability was never in issue and that the Deputy District Judge was not satisfied that “what is meant by a trial is a disposal hearing of this nature”. Upon that basis the Deputy District Judge was of the view that 100% success fee was too high and that 25% should be allowed.

The Claimant appealed upon the basis that the disposal was a final contested hearing and therefore 100% success fee was recoverable. The Defendant did not dispute that the disposal was a contested hearing but took issue with the word “final”. The Defendant’s submissions were rejected by His Honour Judge Stewart who confirmed that a disposal was a “final contested hearing” which actually put an end to the claim. Upon that basis it was a “trial” for the purpose of CPR 45 Section III and a 100% success fee was recoverable.

Where a claimant fails at trial to beat a Part 36 offer made by the defendant

It would seem logical that where a claimant has failed at trial to beat a Part 36 offer made by a defendant that the claimant should not recover a 100% success fee but should recover 12.5%. That is what would have been recoverable had the claimant accepted the offer of settlement as he should have done. The case of Lamont –v- Burton [2007] EWCA Civ 429 demonstrates that while the Court of Appeal agrees with this logic the CPR provides for 100% success fee in that circumstance. The facts of that case arose again out of a road traffic accident funded by a CFA where the issue of damages was concluded at a disposal hearing.

The Defendant had previously made a Part 36 offer of £1,800 on 16 August 2005 which was not accepted. At the disposal hearing on 13 September 2005 the Deputy District Judge awarded damages of £1,774.32. In light of the Part 36 offer the Deputy District Judge awarded the Claimant his costs up to 7 September 2005 and ordered the Claimant to pay the Defendant’s costs incurred since 8 September 2005. The Claimant’s costs were summarily assessed at £4,550.92. These included base costs of £1,573.20 with a success fee of 100%.

The Defendant appealed to His Honour Judge Tetlow on the basis that the District Judge was wrong to allow a success fee of 100% and should have exercised his discretion under CPR 44 to award a different percentage, namely 12.5%. This was because if the Claimant had accepted the Defendant’s Part 36 offer within the time for acceptance the claim would have concluded before trial so that the percentage increase for solicitors’ fees would have been 12.5%.

The Defendant was unsuccessful in his appeal before His Honour Judge Tetlow who agreed with Deputy District Judge Buckley and found that he was bound by the provisions of 45.16 to allow a success fee of 100%. His Honour Judge Tetlow analysed the provisions of CPR 44 and 45 and noted the mandatory nature of the obligation to award 100% success fee. He specifically noted the absence of the words “unless the court orders otherwise” in CPR 45.16 which words were present in CPR 45.15 and concluded that the rule was clear and mandatory.

Upon appeal to the Court of Appeal the Defendant argued that while the rule in CPR 45.16 was mandatory it was open to the Court to allow a different percentage by exercising the discretionary power conferred by rule 44.3. However the Court of Appeal did not accept this submission and found that while the Courts have a wide discretion under CPR 44.3 to make whatever costs order they consider appropriate that discretion does not extend to circumventing the mandatory provisions of CPR 45.

The Court of Appeal went on to say that it accepted that there may be strong policy reasons why a claimant who failed to better a Part 36 offer or payment should not be awarded a higher increase that he would have been awarded if he had accepted the offer. However there were still considerable incentive for a claimant to accept a good Part 36 offer or payment and policy reasons could not affect the clear meaning of CPR 44 and 45. The Court of Appeal accepted that the Part 36 issue was one of difficulty but held that the effect of the rules in their present form was clear and it would have to be a matter for the Rules Committee and the Civil Justice Council to consider whether to amend Part 45 to make special provision to deal with the Part 36 issue.

This case has conclusively decided the position under the current rules however it remains to be seen whether or not the Rules Committee will revisit the issue and amend CPR 45 to take account of Part 36 offers.

It seems that both claimant solicitors and defendant representatives need to be aware of this decision and its implications when considering and advising on negotiated settlements after the issue of proceedings.

The Court’s view of the purpose of the fixed success fee scheme

In the case of Lamont –v- Burton Dyson LJ stated:

“It is inherent in the scheme [under rule 45] that in some individual cases, the success fee will be unreasonably high and in others unreasonably low. But that is the price that has to be paid for achieving certainty and avoiding litigation over the amount of success fees. Rule 44 cannot be invoked to circumvent the careful structure of rule 45 and to undermine its objective of achieving certainty.”

This echoes the comments of His Honour Judge Stewart in the case of Watson referred to above at paragraphs 15 and 16 in which he states:

“The purpose to which I look when I construe these words, because I do not just construe them in a vacuum but in a modern purposive way, is that this is a regime where there will be swings and roundabouts for both sides, but by and large it is intended to be economical to take out a lot of unnecessary decision making to be fair to both sides overall, namely to claimants’ solicitors who have to speculate fees in relation to conditional fee agreements and to defendants’ insurers who have to pay uplifts where appropriate in certain circumstances….So the net result is that there are bound to be in individual cases circumstances where one might look at it and say the claimant solicitors have been fortunate there or they have been unfortunate there, but that is the rub of the green in something which has been the result of hard fought negotaiton and which is intended to have swings and roundabouts in it and where in circumstances such as the present the claimants may count themselves lucky and the defendants unlucky”.

What seems apparent is that the Courts are taking the view that the while under the fixed success fee scheme there may be certain circumstances where a success fee recovered is unduly high to relation the risk in an individual case that is the price that is paid for a simple, predictable scheme. This may be something that the Court considers when dealing with the next issue, upon which there is no case law as yet.

Where there is a settlement of damages and interest prior to the hearing but the issue of costs is decided by summary assessment at a final hearing

The situation sometimes arises where proceedings are issued for the recovery of damages and interest arising as a result of a road traffic accident or accident at work funded by a CFA and a hearing is listed to dispose of the matter. In the meantime the issues of damages and interest are resolved before the final hearing. This leaves the question of costs and it may be suggested that these are dealt with at the final hearing by way of summary assessment. In those circumstances is the claimant entitled to 100% success fee?

When looked at logically once damages and interest have been settled there is no outstanding risk to the claimant’s solicitors of failing to recover costs and it would seem illogical that simply by proceeding to an assessment of costs there should be an increase in the success fee from 12.5% to 100%. However, as we have seen from the cases above the Court’s accept that in some cases claimant solicitors may recover a success fee that is unduly high in the circumstance of a particular case.

This point is already being argued in the lower courts but no final decision has been made. The point being made by defendants is that CPR 45.16 provides for a 100% success fee where “the claim concludes at trial” and “a reference to a ‘trial’ is a reference to the final contested hearing or to the contested hearing of any issue ordered to be tried separately”. Where the Particulars of Claim plead only a claim for damages and interest “the claim” has not been concluded at trial but has been concluded by negotiated settlement. A claimant has no entitlement to costs until an order is made. The application for an order for costs and for costs to be assessed does not form part of the pleaded “claim” and therefore there is no entitlement to 100% success fee. Some of the analysis in making this issue goes to what is considered a “claim” under the CPR and where an entitlement to costs arises. Certainly where a claim for costs is not pleaded from the outset there may be some merit in the argument although it remains to be seen whether this will be accepted by the Courts. In the meantime defendant representatives may wish to keep their eyes out for cases where costs are not specifically pleaded and claimant solicitors may wish to ensure that they plead a claim for costs in all their Particulars of Claim!

Conclusion

The object of the fixed success fee scheme was to achieve certainty and avoid litigation over the amount of the success fee. The case law shows that the Court’s are attempting to uphold this principle and take a straightforward interpretation of the CPR. It would appear that all the possible arguments that can be run in relation to the interpretation of these rules have been run or are being run! No doubt eventually the situation will resolve and settle and costs arguments will move on to the next big thing. Nevertheless in the meantime both claimants and defendants need to bear in mind the cases set out above when negotiating settlements to make sure 100% is recovered where the rules allow for it.

Kirsty McKinlay
1 November 2007
Young Street Chambers

Kirsty McKinlay is a tenant at Young Street Chambers in Manchester specialising in the areas of personal injury, clinical negligence and costs.

Young Street Chambers civil clerks Paul Reeves and Rachel Campbell can be contacted by telephone on 0161 833 0489

or by email: clerks@young-st-chambers.com