- This is an appeal
from a judgment of Field J., sitting, unusually, in Newcastle upon Tyne County
Court dated 25 February 2003. The judge dismissed an appeal from a decision
of District Judge Bullock in costs only proceedings, upholding a finding that
the costs payable by the defendant to the claimant should include a 20% success
fee. Permission for a second appeal was granted because an issue of principle
is raised in relation to the effect of section 58 of the Courts and Legal
Services Act 1990 (‘section 58’) where a trade union funds legal services
provided to one of its members.
- The background
facts were shortly stated by the judge as follows:
"The
claimant, who was a bus driver and the member of a trade union, sought damages
from the defendant for personal injuries suffered in a road traffic accident.
On 18th December 2001 a compromise was reached whereby the defendant’s
insurers agreed to pay to the claimant £2,349.67, plus ‘reasonable costs’
in full and final settlement. The sum of £2,349.67 was paid but the parties
were unable to agree what sum was due by way of reasonable costs. The claimant
accordingly issued Part 8 proceedings claiming costs on the standard basis,
VAT and disbursements in the sum of £2,565.97. The costs sought by the claimant
included a 20% success fee which his union had agreed it would pay to his
solicitors pursuant to a collective conditional fee agreement (‘CCFA’) made
between the union and the solicitors."
- Until this case
reached our court the defendant’s insurers, who have been conducting the litigation
on his behalf, accepted that they were liable to pay the claimant’s costs,
shorn of the 20% success fee. So far as the success fee was concerned, they
contended that the claimant had incurred no liability to pay this to his solicitors
and, accordingly, had no right to recover it as part of his costs. Before
us Mr McLaren QC for the defendant accepts that the ground upon which he objects
to recovery of the success fee would apply with equal force to the balance
of the claimant’s costs, albeit that the defendant’s insurers do not seek
to avoid paying this.
- The legal services
provided to the claimant were rendered pursuant to a CCFA, concluded between
his union and his solicitors. Hitherto the defendant’s insurers have been
prepared to accept, for the purposes of this case, that this CCFA satisfied
the requirements of section 58 and the relevant statutory regulations. Before
us Mr McLaren has sought to withdraw this concession. Miss Guggenheim objects
to this. We uphold her objection. It is too late at this stage to raise issues
as to the validity of the CCFA.
The
indemnity principle and third party funders of legal services
- Section 51 of
the Supreme Court Act 1981 gives the court power, subject to any relevant
statutory provisions and to the rules of court, to determine by whom and to
what extent legal costs are to be paid. There is, however, a well established
principle, known as the indemnity principle, that governs the basis upon which
a court can properly make an award of costs. Subject to any statutory exceptions,
an award of costs can only be made in order to indemnify a litigant against
legal costs and expenses that he has paid, or become liable to pay.
- It is common
for a potential litigant to enter into an agreement with a third party under
which the third party agrees to fund any costs of litigation that may be incurred
by the potential litigant. Pursuant to such agreements trade unions, bodies
such as the Royal Automobile Club, and insurance companies customarily instruct
solicitors to act for their members or assured. When defeated by such a litigant,
unsuccessful parties have, on occasion, invoked the indemnity principle in
an attempt to avoid paying costs. The argument advanced has been that the
successful litigant is not liable for his costs and, therefore, has no right
to recover them. The courts have had no truck with such arguments. They have
defeated them by finding that, in the circumstances under consideration, the
litigant comes under an independent obligation, albeit one that is unlikely
to be enforced, to pay the fees of the solicitor who is acting for him.
- The leading
case is Adams v London Improved Motor Coach Builders, Ltd. [1921] 1
KB 495. The plaintiff’s trade union instructed solicitors to act for him in
a claim for wrongful dismissal. He made no express agreement to retain them,
but permitted them to act for him. The claim succeeded and he sought to recover
the solicitors’ costs from the defendant. The defendant resisted the claim,
contending that it was the union, and not the plaintiff, who was liable for
these costs. Bankes LJ held at p. 501:
"When
once it is established that the solicitors were acting for the plaintiff with
his knowledge and assent, it seems to me that he became liable to the solicitors
for costs, and that liability would not be excluded merely because the Union
also undertook to pay the costs. It is necessary to go a step further and
prove that there was a bargain, either between the Union and the solicitors,
or between the plaintiff and the solicitors, that under no circumstances was
the plaintiff to be liable for costs. In my opinion the evidence falls short
of establishing that necessary fact, without which the defendants are not
entitled to succeed."
Atkin
LJ agreed. He held that the fact that the plaintiff had ‘ratified the act
of the solicitors in acting as his solicitors’ carried with it, in the absence
of express agreement to the contrary, the obligation to remunerate them.
- In Davies
v Taylor [1974] AC 225 the issue was whether a defendant, whose legal
costs had been borne by insurers, could bring himself within section 1 of
the Legal Aid Act 1964, which gave the court power to order "costs incurred
by" a successful litigant to be paid out of the legal aid fund. The House
of Lords, approving Adams, held in favour of the claimant. In the leading
speech, Viscount Dilhorne said at p. 230:
"In
this case the solicitors, no doubt first instructed by the insurance company,
were the solicitors on the record as solicitors for the respondent. They acted
for him and, in the absence of proof of an agreement between him and them
or between them and the insurance company that he would not pay their costs,
they could look to him for payment for the work done and his liability would
not be excluded by the fact that the insurance company had itself agreed to
pay their costs."
- Where a trade
union or an insurance company or a motoring organisation instructs a solicitor
to act for a litigant and agrees to pay his costs, it is not easy to justify
a finding that the litigant comes under an independent obligation to pay the
solicitor. In Lewis v Averay (No 2) [1973] 1 WLR 510 the successful
defendant had enjoyed the benefit of legal services funded by the Automobile
Association, of which he was a member. Lord Denning MR, with whom the other
members of the court agreed, considered it just and equitable that the defendant
should recover his costs from the legal aid fund in order to be in a position
to reimburse the Automobile Association. It is not satisfactory that the right
to recover costs in such circumstances should turn on the question of whether
the litigant has a legal liability to pay such costs, albeit it that such
liability is little more than notional. Miss Guggenheim has, however, been
constrained by the authorities to seek to demonstrate that the claimant came
under a binding obligation to pay his solicitors. To that end it has been
necessary to consider the formal requirements imposed by Section 58 and the
relevant regulations.
Section
58 and 58A and the Regulations
- Sections 58
and 58A of the Courts and Legal Services Act 1990, as amended by section 27
of the Access to Justice Act 1999, provide:
"58.– (1) A
conditional fee agreement which satisfies all of the conditions applicable
to it by virtue of this section shall not be unenforceable by reason only
of its being a conditional fee agreement; but (subject to subsection (5))
any other conditional fee agreement shall be unenforceable.
(2)
For the purposes of this section and section 58A–
(a) a
conditional fee agreement is an agreement with a person providing advocacy
or litigation services which provides for his fees and expenses, or any part
of them, to be payable only in specified circumstances; and
(b) a
conditional fee agreement provides for a success fee if it provides for the
amount of any fees to which it applies to be increased, in specified circumstances,
above the amount which would be payable if it were not payable only in specified
circumstances.
(3) The
following conditions are applicable to every conditional fee agreement–
(a) it
must be in writing;
(b) it
must not relate to proceedings which cannot be the subject of an enforceable
conditional fee agreement; and
(c) it
must comply with such requirements (if any) as may be prescribed by the Lord
Chancellor.
(4)
The following further conditions are applicable to a conditional fee agreement
which provides for a success fee–
(a) it
must relate to proceedings of a description specified by order made by the
Lord Chancellor;
(b) it
must state the percentage by which the amount of the fees which would be payable
if it were not a conditional fee agreement is to be increased; and
(c) that
percentage must not exceed the percentage specified in relation to the description
of proceedings to which the agreement relates by order made by the Lord Chancellor.
58A
- (6) A costs order made in any proceedings may, subject in the case of
court proceedings to rules of court, include provision requiring the payment
of any fees payable under a conditional fee agreement which provides for a
success fee."
- Pursuant to
section 58(3)(c) the Lord Chancellor made, on 9 March 2000 the Conditional
Fee Agreements Regulations 2000 (‘the CFA Regulations’). These lay down extremely
detailed requirements for the form and content of conditional fee agreements
(‘CFAs’), particularly those that provide for success fees. The Lord Chancellor
followed these, on 7 November 2000, with the Collective Conditional Fee Agreements
Regulations 2000 (‘the CCFA Regulations’). These lay down much less exacting
requirements for the form and content of CCFAs. Regulation 3 defines a CCFA
as follows:
"Definition
of "collective conditional fee agreement"
(1) Subject
to paragraph (2) of this regulation, a collective conditional fee agreement
is an agreement which–
(a) disregarding
section 58(3)(c) of the Courts and Legal Services Act 1990, would be a conditional
fee agreement; and
(b) does
not refer to specific proceedings, but provides for fees to be payable on
a common basis in relation to a class of proceedings, or, if it refers to
more than one class of proceedings, on a common basis in relation to each
class.
(2) An
agreement may be a collective conditional agreement whether or not–
(a) the
funder is a client; or
(b) any
clients are named in the agreement."
- Regulation 7
provides:
"Amendment
to the Conditional Fee Agreements Regulations 2000
7. After
regulation 7 of the Conditional Fee Agreements Regulations 2000 there shall
be inserted the following new regulation: –
‘Exclusion
of collective conditional fee agreements
8. These
Regulations shall not apply to collective conditional fee agreements within
the meaning of regulation 3 of the Collective Conditional Fee Agreements Regulations
2000.’ "
- Thus the two
sets of regulations set out to establish two mutually exclusive sets of requirements
for CFAs and CCFAs respectively. There is an obvious reason why those governing
CCFAs are less exacting than those governing CFAs. A prime object of the regulations
governing CFAs is to provide protection for the lay client who is contemplating
entering into a CFA. CCFAs involve bulk users of legal services who are less
vulnerable. Often these will be contracting to purchase, at their own expense,
legal services to be provided to litigants. In those circumstances, the litigants
will not be exposed to significant risk of liability to pay for the legal
services provided to them.
- Sections 58
and 58A and the regulations to which we have referred above are intended to
give effect to fundamental changes to the manner in which litigation is funded
in this country. The history of these changes, and their objects, have recently
been described in detail by this court in the first part of its judgment in
Bradley Hollins v Rev SH Russell [2003] EWCA Civ 718.
The
effect of the CCFA in this case
- Because the
defendant’s insurers indicated that they were prepared to proceed on the basis
that the CCFA was binding in law, little attention has been paid to the precise
terms of the CCFA. The judge recorded that the union had agreed that it would
pay to the claimant’s solicitors a 20% success fee. How and when this agreement
was reached is not recorded, nor is there any finding that it was communicated
to, let alone agreed by, the claimant. What is clear is that, once the union
had instructed their solicitors to act for the claimant, the solicitors sent
to the claimant a client care letter, which included the following statement:
"We
are handling your case under your union’s legal assistance scheme. This means
that although like all clients you are liable for your legal costs and potentially
those of the other side, your union will indemnify you (pay all legal costs
for you) provided you continue to satisfy the conditions of the legal assistance
scheme."
- Mr McLaren has
accepted that, but for the formal requirements imposed by s.58 and the CFA
Regulations 2000, a binding obligation would have been imposed on the claimant
to pay the solicitors who were acting for him in the circumstances that we
have just described. He was plainly right to do so. Adams demonstrates
that all that was required was that he should acquiesce in the instruction
of these solicitors on his behalf by his union. The facts of this case are
stronger, for he did so after receiving the client care letter which informed
him that this would involve a liability to pay these costs.
- Mr McLaren accepts
that, had a binding obligation arisen in these circumstances, it would have
been an obligation to pay the solicitors on the terms agreed with the union
– that is on a conditional fee basis with 20% uplift. Mr McLaren submits,
however, that no enforceable obligation was undertaken. He contends that the
mechanism which might have given rise to such an obligation was, on analysis,
an individual CFA agreed between the claimant and his solicitors. While such
an agreement was reached, it is not enforceable because it does not satisfy
the requirements of the CFA Regulations. This is not an attractive submission.
The requirements of those Regulations are designed to protect those who enter
into CFAs and are of no legitimate concern to defendants. Furthermore, where
legal services are provided to a litigant under a CCFA by a trade union or
other body, there is normally little need for such protection. Mr McLaren
accepts that the manifest object of having a different regime for CCFAs from
that applying to CFAs was to simplify the formalities of supplying legal services
pursuant to the former. He submits, however, that because the Regulations
have been made in haste they are subject to a defect which no legitimate purposive
construction can remedy. If costs incurred pursuant to a CCFA are to be recoverable,
the individual who receives the legal services in question must enter into
a CFA which satisfies the requirements of s.58 and the CFA Regulations.
- Field J accepted
similar submissions. He held that "any agreement relied on as satisfying
the indemnity principle is bound to be a conditional fee agreement caught
by s. 58 and the Conditional Fee Agreement Regulations." He went on to
hold, however:
"11. This
however, is not an end of the matter. Section 58A(6) of the 1990 Act provides:
A
costs order made in any proceedings may, subject in the case of court proceedings
to rules of court, include provision requiring the payment of any fees payable
under a conditional fee agreement which provides for a success fee.
12. Section
58A(6) was introduced into the 1990 Act by s. 27 of the Access to Justice
Act 1999. Section 30(2) of the latter Act is similar to s.58A(6). It reads:
30(2) If
in any of the proceedings a costs order is made in favour of any of the members
or other persons, the costs payable to him may, subject to subsection (3)
and (in the case of court proceedings) to rules of court, include an additional
amount in respect of any provision made by or on behalf of the body in connection
with the proceedings against the risk of having to meet such liabilities.
13. In
my judgment, the effect of s.58A(6) of the 1990 Act and s.30(2) of the 1999
Act is that the costs orders they provide for can be made notwithstanding
that such orders might infringe the indemnity principle."
- Field J was
only concerned with an attack on the 20% success fee. While the provisions
to which he refers undoubtedly evidence derogation from the indemnity principle,
we do not consider they enable a litigant to recover costs payable under a
CFA which is unenforceable because it does not comply with s.58 or the CFA
Regulations in a material respect – as to which see part 5 of the judgment
in Hollins v Russell. While Miss Guggenheim has sought to uphold Field
J’s reasoning set out above, her energies have primarily been directed to
a challenge, pursuant to a Respondent’s Notice, to the judge’s conclusion
that the claimant could only become subject to a binding obligation to pay
his solicitors if he complied with the CFA Regulations.
- We have concluded
that Miss Guggenheim’s challenge is well founded. The agreement under which
the union agreed with their solicitors that they should represent the claimant
was a CCFA. For the purposes of these proceedings it is presumed to have been
a valid CCFA that complied with the CCFA Regulations. The union so agreed
with the authority of the claimant. An alternative view is that the claimant
ratified the agreement reached by the union on his behalf by availing himself
of the services of the solicitors. On either footing, the contract pursuant
to which he came under a liability to pay the solicitors for their services
was a CCFA. As such, it was not subject to the CFA Regulations.
- For these reasons
the claimant is able to establish the necessary liability on his part to pay
for the legal services provided to him. He is thus in a position to recover
these as costs without infringing the indemnity principle. For these reasons,
which differ from those of the judge, this appeal is dismissed.